Types of Bear Market
There are three primary categories of bear markets, classified based on their duration and underlying economic conditions.
Main Categories
- Cyclical Bear Market — a short-term bear market that occurs during an economic downturn, characterized by a decline in stock prices and economic activity, as seen in the 1990 bear market triggered by the Gulf War and subsequent recession, which affected companies like General Motors.
- Secular Bear Market — a long-term bear market that lasts for several years or even decades, marked by a persistent decline in stock prices and economic stagnation, exemplified by the 1966-1982 bear market in the United States, which impacted the growth of companies like Coca-Cola.
- Event-Driven Bear Market — a bear market triggered by a specific event or crisis, such as a war, natural disaster, or financial crisis, characterized by a sudden and sharp decline in stock prices, as illustrated by the 2020 bear market caused by the COVID-19 pandemic, which severely affected the stock price of companies like Norwegian Cruise Line.
Comparison Table
| Category | Duration | Causes | Impact on Stock Prices |
|---|---|---|---|
| Cyclical Bear Market | Short-term (less than 2 years) | Economic downturn, recession | Sharp decline (10-20%) |
| Secular Bear Market | Long-term (several years or decades) | Economic stagnation, structural issues | Persistent decline (20-50%) |
| Event-Driven Bear Market | Variable (depending on the event) | Specific event or crisis | Sudden and sharp decline (10-50%) |
How They Relate
The categories of bear markets are not mutually exclusive, and they can overlap or feed into each other. For example, a cyclical bear market can be triggered by an event-driven bear market, as seen in the 2008 financial crisis, where the initial event-driven bear market caused by the housing market bubble burst led to a cyclical bear market. Similarly, a secular bear market can be the result of a prolonged cyclical bear market, as witnessed in the 1970s, where the combination of high inflation and economic stagnation led to a long-term decline in stock prices. The distinction between these categories is crucial, as it can inform investment strategies and help investors navigate different market conditions. Specifically, the pairing of cyclical and event-driven bear markets can be particularly challenging, as the sudden onset of an event-driven bear market can exacerbate the decline in stock prices during a cyclical bear market, while the combination of secular and cyclical bear markets can lead to a prolonged period of economic stagnation and decline in stock prices.