Throughout 2022, two of the most popular terms among investors have been “inflation” and “recession.” But much of the focus on these economic turbulence indicators seems to circle back to one common theme: that of a bear market. Generally recognized as a harbinger of poor economic conditions, a bear market tends to frighten most investors. And while a bear market often means a significant dip in stock prices, that does not necessarily mean that a recession is imminent.
In this InvestorPlace Ultimate Guide, we’re going to break down exactly what a bear market is, what it means for markets, and what investors can do to protect their portfolios right now. We’re also going to cover the types of investments that often do the best job holding up when a bear market is raging.
One basic principle to be aware of is that bear markets occur and are normal as stocks and other financial assets do not move in only one direction. They can be flat, and certainly, they can decline. In this context, a bear market is just one of three phases representing any financial market.
In other words, investors have no reason to panic. Simply follow this guide and make savvy portfolio moves to end up on the right side of the storm!
Bear Market Definition
The most basic question that investors should ask is: What is a bear market?
Put simply, it is the stark opposite of a bull market, the term used when financial markets are strong and buying is encouraged. The Associated Press provides the following definition:
A bear market is a term used by Wall Street when an index like the S&P 500, the Dow Jones Industrial Average, or even an individual stock, has fallen 20% or more from a recent high for a sustained period of time.
It is also important to address another question, though. Why do we call it a bear market? As InvestorPlace contributor Vandita Jadeja noted, the terms bull and bear market derive their names from the ways in which both animals attack their prey. In her words:
If you think of a bull attacking its prey, you will notice that its horns are typically pointed upwards, while a bear will have its head downward. In the same manner, bulls and bears have an impact on the stock market. The prey is your investment portfolio and it is being attacked in a downward motion. Hence, when this happens, it is called a bear market.
Bear Market History
For historical context, it is important to note that we have seen bear markets before. They often follow major economic events that cause significant disruptions throughout the economy at large. In March 2020, the start of the Covid-19 pandemic sent the Dow Jones Industrial Average into its first bear market in more than a decade. The most recent bear market before that had been a 17-month period that lasted from 2007 to 2009 as the housing bubbles burst.
Prior to that, investors witnessed one in the early 2000s after the bursting of the dot-com bubble. This event caused the S&P 500 to fall almost 37% over a period of roughly 1.5 years.
While these were not the only bear markets throughout history, they are the most recent. As InvestorPlace contributor Tim Biggam noted:
Stocks tend to go through a bear market , but they have been less frequent since World War II (WWII) with an average of nearly six years between bears since 1942. The post-WWII bears also have been a little less unpleasant with an average loss of just over 34%.
How Long Do Bear Markets Last?
There is no exact answer, although the average length is 9.6 months. However, investors should note that this is much shorter than the average length of a bull market, which is 2.7 years.
Biggam also provided some historical context regarding bear market length. “The average length of the previous bear market has been just under a year at 343 days,” he reported in July 2022. “The longest bear market was in 1930 and lasted for 783 days. The shortest bear market was just 32 days and occurred during the Covid-19 crisis of early 2020.”
While those numbers don’t tell us exactly how long the current bear market will last, they provide some context as to what investors can expect.
How to Protect Your Portfolio in a Bear Market
For worried investors, yes, there are ways to ensure that your portfolio stays protected during a bear market. Much of the strategy centers around keeping assets diversified as a means of weathering market uncertainty. Thankfully, lining your portfolio with the types of investments that do well in a bear market isn’t too complicated.
Mark Riepe, who serves as the managing director of the Schwab Center for Financial Research, offers investors the following advice:
Your long-term assets should be divvied up among a wide array of domestic stocks — big and small, fast-growing and dividend-paying — as well as international stocks, real estate investment trusts (REITs) and commodities. That mix gives you exposure to asset classes that tend to move at different times and speeds.
InvestorPlace contributor Tezcan Gecgil took this a step further, laying out seven asset classes for investors to hide their money during a bear market. She highlights:
- Blue-chip stocks
- Healthcare stocks
- Real estate stocks
- Utility stocks
- Art markets, including non-fungible tokens (NFTs).
“A bear market can be easier to endure when you’re well-diversified and in the market for the long term,” she noted.
Bear Market Stocks to Buy
It’s clear that to survive a bear market, investors are well advised to focus on certain sectors. But investors shouldn’t just strive to survive these market downturns — they can also turn a profit if a proper investment strategy is executed.
As InvestorPlace contributor Alex Sirois noted, “There are massive opportunities in every bear market, including this one.”
Sirois sees significant potential in the consumer staples and healthcare sectors, naming them among the best to buy for a bear market. Two stocks he likes are Campbell Soup (NYSE:CPB) and Coca-Cola (NYSE:KO), popular household names that Americans trust. These picks are echoed by other experts, who have also named companies such as Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL). Popular picks for the healthcare sector include Intuitive Surgical (NASDAQ:ISRG), Teladoc Health (NYSE:TDOC) and UnitedHealth Group (NYSE:UNH).
Investors should also consider the example of Warren Buffett. The investing icon has spent decades weathering difficult financial markets and has stayed profitable through good times and bad. Some may want to follow his example. Buffett’s bear market investments include oil giant Chevron (NYSE:CVX), banking institution Citigroup (NYSE:C) and insurance holding company Markel (NYSE:MKL).
For investors seeking to diversify their holdings, there are also cryptos worth buying for a bear market. InvestorPlace contributor Muslim Farooque believes seven cryptos currently have significant potential.
“The market has come of age and offers more real-world utility than ever before. Many top cryptocurrencies aren’t moving purely on hype anymore, as their use-cases have added significantly to their long-term growth runways,” he wrote. These picks include Bitcoin (BTC-USD), Ethereum (ETH-USD) and Solana (SOL-USD), which Farooque touts for their utility and applications for the fintech sector.
Should You Sell Your Stocks?
When market conditions take a turn for the worst, it’s always tempting to sell. But as Jadeja noted, “A smart investor will never sell during a bear market. Panic selling can ruin your portfolio and take you away from your financial goals.”
Jadeja echoes the bullish claim that investors should regard a bear market as an opportunity to buy stocks trading at a discount, not to offload holdings.
While bear markets offer investors opportunities to profit, there are still important factors to consider. Some stocks offer too much risk in a bear market. This often includes high-growth tech stocks that boom in better economies. According to InvestorPlace contributor Steve Booyens, both Netflix (NASDAQ:NFLX) and Nvidia (NASDAQ:NVDA) should be avoided due to their high valuations. Chris Lau flags Amazon (NASDAQ:AMZN) and Disney (NYSE:DIS) as two stocks that won’t hold up well in a bear market.
To stay profitable, investors should focus on the stocks to buy on the dip that are likely to rebound when market conditions inevitably improve. Patience is key to staying ahead in turbulent economic times.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.