“The basic reason that the market is down has not changed. We are in a bear market, stocks are overpriced and the earnings are not very good.” – Mike Farrel
Bear market is a reference term used for stock market, during which stock price consistently fall. The decreasing prices encourages selling of stocks by the investors. As more and more investors want to sell their stock, supply increases while demand decreases.
The sharp decline in stock prices is normally due to decrease in corporate profits. This scares investors, creates negative sentiment among investors and encourages them to sell their stocks. This causes economy to enter a recession, drives unemployment and inflation high. As a result Investors lose faith in market, which in turn further decreases the demand for stocks.
Different attitude of investors shapes bear market in different ways. Some investors are optimistic and long term players, they wait for corrections in market however most investors cannot help but worry about day to day shifts with their portfolios. Optimistic investors don’t change long term plans but make some small adjustments to portfolio help cushion losses. History has shown that stock market and economy move in cycles that repeat over and over, therefore understanding the different stages of economy can help guide your investments.
Bear market should not be confused with corrections in market, as they are for short term. While corrections are good point of entry for investors, if they are properly analyzed by investors. Wise decisions in this period can generate positive returns for investors.