What is a bear market? How to spot one — and what to do to sail smoothly through it

The stock market has its ups and downs, but when those downs become prolonged and severe, analysts start talking about bear markets. These extended downturns test the most resilient financial strategies and can lead investors to question their course.

A bear market is when a major stock index falls by 20% or more from its recent high and remains there for at least two months. Analysts typically look at broad market benchmarks like the S&P 500, the Dow Jones Industrial Average or the Nasdaq Composite. The S&P 500, which tracks the performance of the 500 largest U.S. companies, is most commonly used as the reference point for declaring an official bear market.

In early April 2025, stocks plunged following President Trump’s announcement of sweeping new tariffs, with the S&P 500 falling nearly 20% from its February peak. This decline brought the index to the edge of bear market territory. However, markets have since recouped almost all losses after the White House announced a 90-day pause on many aggressive tariffs.

It remains uncertain whether this recovery will hold or give way to further volatility, that’s why it’s essential to understand what bear markets are and the best ways to navigate them. Let’s explore what these downturns mean for your money and how you can ride them out safely.

In this article

What is a bear market?

A bear market is a stock market decline that sticks around for a lengthy period. When a major index like the S&P 500 falls by 20% or more from its recent peak and stays down for at least two months, that’s officially a bear market. It’s not just a quick dip or a few bumpy weeks like we saw earlier this year — it’s a sustained drop that shows investors have persistent worries about the direction of the economy.

Why “bear”? One theory suggests that the term originated from trading practices in the 18th century. Some traders sold bearskins they didn’t yet own in hope that prices would drop before the delivery date — so that they could buy the skins cheaper later. This selling high and buying low became known as “bearish” behavior. On the other hand, optimistic traders became known as “bullish.”

There are different types of bear markets, including:

• Cyclical bear markets. These usually last a few months to a couple years and are just part of normal economic ups and downs. They often happen when the economy slows down or when the Federal Reserve changes its monetary policy.

• Structural bear markets. These happen when there are deep-rooted problems like excessive debt, market bubbles or major shifts in economic policies. While they can last for extended periods, it’s the underlying structural issues — not just time — that define them.

• Event-driven bear markets. These happen because of a specific shock — like the COVID-19 pandemic in 2020. They can be sharp and painful but sometimes end more quickly than other types.

Bear market vs. bull market

Bull markets are the opposite of bear markets. They’re periods when stock prices are climbing steadily higher. While bear markets reflect pessimism, bull markets show that investors are optimistic and confident about the economy.

Bull markets typically last much longer than bear markets. The average bull market lasts for 6.6 years compared to 1.3 years for bears, according to First Trust, a financial services firm in Wheaton, Illinois. They also tend to produce much bigger total returns than the losses in bear markets, which explains why the overall financial markets have grown over time despite occasional downturns.

Are we in a bear market right now?

The short answer is no, we aren’t in a bear market. After strong market gains in 2023 and 2024, U.S. stocks hit a rough patch in early 2025 when President Trump announced sweeping new tariffs on imported goods. The news sent stocks tumbling, with the S&P 500 falling about 19% from its February peak by mid-April — just shy of the 20% threshold that officially marks bear market territory.

The market reaction was swift and sharp. Investors worried that these tariffs could trigger a global trade war as other countries announced retaliatory measures. China quickly responded with its own tariffs, and the European Union threatened similar actions.

However, the market landscape shifted again when the White House announced a 90-day pause on implementing some of the most aggressive tariffs in early May. This news led to a sharp rebound, with stocks recovering most of their losses in just a few trading sessions.

Wall Street experts are split on what happens next. Some point to still-strong corporate earnings and consumer spending as reasons to be optimistic. Others worry that the 90-day tariff pause is just delaying inevitable trade tensions.

For now, we’ve avoided an official bear market, but the situation remains fluid as investors closely watch each new economic report and trade policy announcement.

5 signs that often signal a bear market

Several warning signs may signal the early stages of a bear market. While none of these indicators guarantees a market downturn, they typically appeared before or during past bear markets. These signals work best when you consider them together rather than each on its own.

Here are some of the main signs to watch for:

• Inverted yield curve. Normally, long-term loans like 10-year government bonds pay higher interest than short-term loans like 3-month bonds. When this trend flips and short-term rates are higher, investors call it an “inverted yield curve.” Banks find it harder to make money in this environment, and historically, it has often happened before economic slowdowns.

• Rising interest rates. When the Federal Reserve fights inflation by significantly hiking rates, borrowing becomes more expensive for everyone. This typically slows economic growth and puts pressure on stock prices, especially for companies with high amounts of debt.

• Overvalued stocks. Just like real estate or other assets, stocks can become too expensive for their value. If a company earns $1 per share each year but its stock price is $100, that’s a price-to-earnings (P/E) ratio of 100. When these ratios get much higher than their historical averages, the stock market may go through a corrective period that lowers asset prices.

• Shrinking company profits. When businesses start reporting lower earnings or warn investors that future profits will be weaker than expected, it often triggers broader market selling as investors reassess what companies are worth.

• Breaking below key price levels. Investors often track average stock prices over the last 200 trading days (about 10 months of trading). When prices fall below this average, it often signals that the market’s positive momentum has shifted to negative.

Does a bear market mean a recession is coming?

While bear markets and recessions often happen around the same time, one doesn’t automatically lead to the other.

A bear market is about the stock market as it refers to stock prices falling by 20% or more from recent highs. A recession, on the other hand, is about the broader economy as it typically refers to at least two consecutive quarters of declining economic output, along with other factors like rising unemployment and falling consumer spending.

Eight out of the last 16 bear markets have been associated with recessions, according to LPL Financial. The stock market tends to look ahead, which is why it sometimes drops before economic data confirms a slowdown. In some cases, bear markets serve as an early warning system, with stocks falling months before the broader economy contracts.

However, there have been several bear markets without corresponding recessions. For example, the 1987 market crash known as Black Monday saw the Dow Jones Industrial Average, an index that tracks the 30 largest U.S. companies, lose over 22% in a single day, but no recession followed.

When investors worry about the future, they may sell stocks, potentially triggering a bear market. If those concerns prove correct, a recession may follow. But sometimes market fears turn out to be overblown, and the economy continues to grow despite the stock drop.

How bear markets impact your investments

Bear markets have varying effects on different parts of your investment portfolio. Stocks typically take the biggest hit — that’s what defines a bear market, after all. But even within the stock market, some sectors get hit harder than others.

Your fixed-income investments in bonds from the federal government and FDIC-insured accounts like certificates of deposits (CDs) often help stabilize your portfolio during a bear market since their value doesn’t fluctuate with stock market movements and they continue to generate predictable interest income.

A significant market drop just before or during retirement can have a bigger impact than the same drop earlier in your career when you have more time to recover. This risk means that retirees may need to adjust their withdrawal strategy during declining markets or have a larger cash cushion to protect their portfolios and avoid selling undervalued assets.

Industries that typically suffer most in bear markets

• Consumer discretionary. Stocks of companies selling non-essential goods like cars, furniture and luxury items often decline more sharply as investors anticipate consumers cutting back on optional purchases during uncertain times.

• Financial companies. Bank and investment firm stocks typically underperform during bear markets as investors worry about potential losses on loans, decreased transaction volume and reduced profitability.

• Technology stocks. Fast-growing tech companies, especially those with high valuations but limited profits, often experience sharp stock price corrections when investors become more risk-averse and seek safety.

• Industrial manufacturers. Stocks of companies making machinery, equipment and supplies for businesses often decline more severely as investors expect businesses to delay capital investments.

Industries that stay resilient during bear markets

• Consumer staples. Stocks of companies selling everyday essentials like food, beverages and household products usually don’t fall as much because investors expect consistent sales regardless of market conditions.

• Utilities. Electric, water and gas provider stocks generally decline less during bear markets thanks to their steady cash flows and dividend yields, which become more attractive during market downturns.

• Healthcare. Medical services and pharmaceutical companies often demonstrate greater resilience during market downturns since investors expect healthcare spending to continue regardless of economic conditions.

• Discount retailers. Stocks of budget-friendly stores may outperform the broader market during bear markets as investors anticipate that these businesses may maintain or even grow their customer base.

How to successfully navigate a bear market

While there’s no perfect playbook that works for everyone, one of the most important strategies during bear markets might be maintaining perspective. Remember that bear markets are normal parts of investing, not permanent conditions. Historically, markets have always recovered and reached new highs after enough time.

You can prepare for potential downturns and navigate these challenging periods with several time-tested approaches:

• Build an emergency fund. Having three-to-six months of expenses in cash gives you a cushion against difficult times and helps you avoid selling investments at reduced prices to cover unexpected costs.

• Diversify your investments. Spread your money across different types of assets, industries and even geographic regions to reduce the impact of any single area performing poorly on your overall portfolio.

• Consider adding some defensive assets. These are investments that typically hold up better during market downturns. Treasury bonds and high-quality corporate bonds, which are two forms of loans to the U.S. government and financially stable companies, along with stocks of companies in essential sectors that pay regular dividends, can provide stability when markets are unstable.

• Avoid selling near market bottoms. Oftentimes, the biggest risk isn’t the bear market itself but how you respond to it. Panic selling during downturns is one of the most common and costly financial decisions investors make. Many who sell during declines miss the eventual recovery.

Keep in mind that bear markets don’t always lead to economic recessions, but they can signal tougher economic times ahead. That’s why bear markets and recessions share the same preparation strategies, including building cash reserves, avoiding emotional decisions and focusing on long-term financial health rather than reacting to short-term market movements.

Consider working with a registered investment advisor who can help you navigate these strategies. A good advisor can provide an objective perspective when emotions are running high, keep you focused on long-term success rather than short-term market movements and help you build a comprehensive wealth management plan tailored to your specific goals.

Dollar-cost averaging during downturns

One of the most powerful strategies during bear markets is to continue making regular investments through a popular strategy known as dollar-cost averaging:

• You invest a fixed amount on a regular schedule (like $500 every month)

• When prices are lower, your fixed amount buys more shares

• When prices are higher, your fixed amount buys fewer shares

For example, if you invest in a broad market mutual fund or exchange-traded funds (ETFs) before and during a bear market, you’ll automatically buy more shares when prices go down. When the market eventually recovers, you’ll own more shares than if you had invested only when prices were higher.

This approach eliminates the need to perfectly time the market or closely watch its every move. It also gives you the psychological benefits of having a systematic process that removes emotion from investment decisions during periods of volatility. By trusting the system you set up, you may have an easier time keeping your hands off your portfolios and avoiding poor moves.

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FAQs: Bear markets and your investment portfolio

Find out more about how bear markets impact your finances. And take a look at our growing library of personal finance guides that can help you save money, earn money and grow your wealth.

Should I pull my money out of the stock market before it crashes?

Trying to time the market by selling before crashes and buying before recoveries rarely works well in practice. Morningstar research shows that even professional investors struggle to consistently get this timing right. If you sell based on predictions of a crash, you risk missing out on potential gains if the market continues rising, and you might not get back in before the eventual recovery. Instead of trying to time exits and entries, focus on having a consistent investment strategy such as dollar-cost averaging along with maintaining a well-diversified portfolio that matches your goals and risk tolerance. This disciplined approach may not feel as exciting, but it has proven more effective for most investors over the long run.

Should I invest during a bear market?

Yes, continuing to invest during bear markets is often a smart move for long-term investors. When prices are down, your money buys more shares, potentially improving your returns when the market eventually recovers. Remember that past performance isn’t necessarily indicative of future results, but historically, investors who continued buying during downturns have been rewarded when markets recovered. Investing Regularly through your 401(k), IRA or brokerage account lets you take advantage of lower prices without trying to guess the perfect moment to invest.

What is the difference between a recession and a depression?

A recession is a significant decline in economic activity that lasts for two or more consecutive quarters. A depression is a much more severe and prolonged economic downturn, generally lasting years rather than months, with unemployment reaching extremely high levels. The Great Depression of the 1930s saw unemployment reach 25% and lasted about 10 years. While we’ve experienced multiple recessions since then, we haven’t had another economic depression of that magnitude.

Editorial disclaimer: Information on this page is for educational purposes and not investment advice or a recommendation to buy any specific asset or adopt any particular investment strategy. Independently research products and strategies before making any investment decision.

Sources

About the writer

Yahia Barakah is a personal finance writer at AOL with over a decade of experience in finance and investing. As a certified educator in personal finance (CEPF), he combines his economics expertise with a passion for financial literacy to simplify complex retirement, banking and credit topics. He loves empowering people to make informed financial decisions that improve their everyday and long-term wellness. Yahia’s expertise has been featured on FinanceBuzz, FX Empire and EarnForex. Based in Florida, he balances his love for finance with freediving, hiking and underwater photography.

Article edited by Kelly Suzan Waggoner

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