5 Signs We’re in a Bear Market (and What You Can Do)

There are ways to make your investment portfolio work for you even during an economic downturn.

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Updated May 13, 2024
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Investors are closely watching their portfolios, worrying what the future may hold for their investments. But how do we know when a bear chases the bull out of the stock market? While there is no way to know for certain when a bear market will strike, here are some signs we may be headed in that direction so you can prepare financially.

1. Stock market decline

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This is the most obvious sign for investors that a bear market may be on the way in. The typical benchmark for a bear market is if the market comes down at least 20% from its high mark. This could be spread out over the stock market in general or a specific index like the S&P; 500 or Nasdaq. You could also have a bear market in specific sectors, such as tech, or commodities, such as oil or gold. There isn’t a set duration for the decline, which means it could last weeks or even months depending on specific market conditions.

Pro tip: Some of the best brokerage accounts may offer advice to help you ride out a bear market without losing too much of your money. It may be a good idea to look into them now so you’re prepared for a potential bear market down the road.

2. Overly optimistic investors

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This may sound counterintuitive, but being too optimistic about the market may not be a good thing. It could lead investors to get greedier, continuing to buy even as the market reaches new highs. It could entice newcomers to stock investing, pushing prices higher. It also could make investors too confident and lure them into riskier stocks. If those types of investments show any decline, it could lead to a sell-off, which makes a bear market become more likely.

3. Layoffs

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One sign companies may be worried about their economic future is layoffs and downsizing. Cutting employees may be a good way to get some of those extra expenses out of the operating budget to prepare for a decline in business. The Bureau of Labor Statistics is a good place to go for employment data, including layoffs. And you may want to check in with your own social circles. If you have friends who get let go, it may be a sign of economic turmoil ahead.

4. Declining company earnings

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Another big sign the stock market may be headed into bear territory is company earnings. Keep an eye on quarterly earnings from major companies. If they lose money for a quarter or just miss expectations by a certain amount, it could be a sign their earnings potential in future quarters may also be in a decline. Also consider which sectors are seeing the biggest hits to their earnings reports, which could lead to a bear market in a particular sector.

5. Political issues

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Instability in domestic and foreign events could also have a potential effect on the market. The Covid pandemic, for example, caused the stock market to fall into bear territory in 2020 and recent development in Ukraine may have an effect on the market. Any event that could cause companies to be uncertain about the future of their business might lead to market declines, so watch how events like this could start shaping the market.

These signs of a bear market can be cause for concern, but you may want to take a breath and reassess your portfolio before you start selling off some of your investments. There are ways to ride it out if we’re headed toward a bear market. So what should you do if you think the bull has run its course? Here are a few different investments to consider.

Money move #1: Think about a high-yield savings account

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Some of the best savings accounts to consider during a bear market may be high-yield accounts. They might earn you steady interest on your cash regardless of how the stock market is swinging, and might even outperform a bear market if stocks decline too much. As a more conservative investment, a high-yield savings account might provide some shelter during the rocky times and earn interest that can be invested if there are signs the stock market may go up again.

Money move #2: Look into index funds

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Now may be a smart time to rebalance your portfolio and make it more diverse. One way to do this might be investing money in an index fund, which is a type of mutual fund or exchange-traded fund designed specifically to track a particular index, such as the S&P; 500, Nasdaq, or the Dow Jones Industrial Average. They usually contain a large number of stocks covering diverse industries. 

Index funds have the potential to smooth out some of the more drastic market spikes — both those going up and going down — which makes them appealing for investors trying to ride out a bear market.

Money move #3: Consider staying in stocks

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Market downturns are inevitable, and they can be scary for the average investor. As more red pops up on an investor’s holdings, the natural reaction may be to sell out before they go lower. But this could also be a smart time to invest because stock prices are lower than during a bull market. 

Look at how you’re budgeting your investment dollars and consider if you want to put some extra cash into the market every month. You may not want to put a large chunk in at once, but slow and steady could pay dividends if you have the time to wait for your investments to go back up.

Bottom line

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By its nature, the stock market can be volatile, and there is always a risk of losing money. As the saying goes, past performance is no guarantee of future returns. Investors may want to have different strategies in mind depending on which way the market is heading. You should do what is right for you, your comfort level, your financial portfolio, and your wealth outside of the market.

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Author Details

Jenny Cohen

Jenny Cohen is a freelance writer who has covered a bit of everything, from finance to sports to her favorite TV shows. Her work has been featured in The Wall Street Journal, USA Today, and FoxSports.com.