What does the bear market mean for investors?

9 July 2008

We are now officially in a bear market, with the FTSE 100 down by more than 20% since its peak last autumn.

But what is a bear market, how long is it likely to last and what does it mean for investors and consumers?

The definition of an official bear market is when the stockmarket falls or is expected to fall for a prolonged period of time. A bear market is generally considered to have occurred with multiple indexes are down by around 20%.

In contrast, a bull market is when a market sees a long term, persistent uptrend, lasting anything from a few months to years.

A nasty feature of a bear market is that it is self-fulfilling – when investors see the price of their shares falling, the herd mentality takes over and many run for the hills, which in turn fuels further falls. This means that bear markets have a habit of sticking around for some time. For example, the infamous bear market in the 1970s saw stockmarkets suffering stocks for over a decade.

So how long is the current bear market likely to last? Without a crystal ball it is hard to say for sure.

Simon Denham, managing director of Capital Spreads, isn’t optimistic. “Bear markets are distinguished by their lifetime as well as how low they go and when you look at the last bear market we endured, which started in 2000, it lasted a good three years,” he says.

“So if the credit crunch from a year ago was the trigger, (which seems most likely since bank stocks started to tumble then) we could be looking at depressed stock prices until the end of the decade.”

While we are technically in a bear market in terms of stockmarket performance, experts say that the UK is still not in a recession – for now at least.

Ted Scott, manager of the F&C UK Growth & Income Fund, points out that the technical definition of a recession is two quarters negative growth.

“At present the UK economy has only just begun to slow after a robust 2007 when gross domestic product growth was above trend,” he adds.


But that doesn’t mean a recession isn’t on its way. Some experts believe that a recession will be with us in just three months time, but Scott believes it is more likely to come in the first quarter of 2009.

“The lifespan of the current bear market depends on the extent of the recession we have here in the UK,” he adds. “There is a good chance the economy will go into recession at some point next year, probably in the first quarter.”

The technicalities of whether we are in a bear market, and whether the recession is coming this year or the next, won’t matter to many people. After all, the impact of the slowing economy remains the same.

Mark Dampier, head of research at Hargreaves Lansdown, says giving the current climate a name is a “waste of time”.

“A real recession is only called after it has happened – what matters to investors and consumers is what is going on now,” he says.

For both Dampier and Scott, the current climate does present an opportunity for investors, who should think about how to make the most of cheaper shares rather than bury their heads in the sand.

“Now is the time to start reviewing your options and find the opportunities,” says Dampier.

However, equities are highly unlikely to have already bottomed – meaning investors should be a bit careful about where they make their investments, Dampier warns.

“There are opportunities but investors must be careful about what they buy as share prices are very volatile,” adds Scott. “In the medium term there is potential to make lot of money but the real skill is making the right buying decisions.”

In general terms, investors can expect the stockmarket to recover and bounce back before the end of any eventual recession. When that will happen is near impossible to call.

“Trying to call the market is impossible and a very dangerous game to play – it’s a madness not a science,” say Matt Pitcher, wealth adviser at Towry Law. “Our advice is that if you aren’t in the market when the upturn comes then you will miss out, so people happy to ride it out need to get in now and stay in.

"Close your eyes for a bit if necessary but don’t try and dip in and out of the market.”

Private investors are never going to have the information or research to be able to accurately predict when the market will bounce back. Those who get it right do so through luck.

Kate Warne, a market strategist at Edward Jones, says long-term investors shouldn't attempt to sell in order to limit losses. She instread recommends they ignore gloomy predictions as historically markets have rebounded, stay invested in a diversified portfolio and patiently add equity investments that have fallen in price.

"Remember, bear markets happen regularly, and we think your best approach is to stay with your long-term strategy rather than letting current market conditions distract you," Warne adds. "Sockmarket declines are normal, happen frequently and are not a reason to sell quality investments. Instead, look for opportunities in equities that are appropriate to help you achieve your long-term goals."

In addition, the message seems to be that, unlike bulls, bears are solitary creatures. Investors should learn from their example and avoid following the herd.

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