With no concrete stimulus bill in place, the public faces a possible bear market, one characterized as a market in decline.
A market is considered a true “bear” market after falling 20% or more from recent highs. For an example of this, we can look to last March, when the Dow Jones Industrial Average, S&P 500, and Nasdaq all entered bear market territory for the first time in 11 years due to impacts of Covid-19.
Share prices continuously drop in a bear market. This is because more people want to sell than buy; so demand is significantly lower than supply. And of course, when this happens, share prices drop. As a result, market sentiment is negative. When faced with a downward trend, investors often believe it will continue, consequently perpetuating this spiraling.
Bear markets are associated with a weak economy because during this period the economy slows and unemployment rises. Also, most businesses are unable to record huge profits because consumers are not spending nearly enough. This decline in profits directly affects the way the market values stocks.
When looking for bear-ish conditions, consider performance over the long term. A chance of losses is greater during these periods because prices are continually losing value. However, as Warren Buffett once put it, “[be] fearful when others are greedy, and greedy when others are fearful.”
In sum, perfectly timing the market is impossible; therefore, investors should always look for evidence of a substantial market condition, and make decisions accordingly.
