If you have been investing in the stock market or cryptocurrencies for a while, you've probably seen a drop in your positions. Therefore, it's a crucial time to ask yourself what to do in a bear market. In this Hapi article, you'll learn what a bear market is and which investment strategies you might consider during a bearish market.

What is a bear market?

The term "bear" is associated with the way this animal attacks: moving its paws downward. Using that reference, a bear market is a market with a downward trend: it's a period where the prices of stocks, cryptocurrencies, ETFs, and other financial assets drop continuously. It differs from a market correction because the duration and magnitude of the bearish trend are greater.

Typically, we consider a bear market to occur when the prices of major indexes (such as the S&P 500 and the Nasdaq) have fallen by at least 20% from their last peak. During this period, stocks tend to mark lower highs and lows.

This all occurs in a context where the outlook for economic performance is pessimistic, and uncertainty prevails. This negative environment affects stock and cryptocurrency prices because these assets reflect future growth expectations of companies and projects. The collective fear of investors leads them to sell at increasingly lower prices to avoid larger losses. A tool that some experts use to gauge market sentiment is the CNN Fear & Greed Index.

As seen in the above chart, extreme fear is currently driving the market.

Let's explore recent stock market events

The New York Stock Exchange reached all-time highs in late 2021, but it has been falling since 2022. Three key factors influence the low returns on American stocks:

• Rising inflation: After the economy reopened, the monetary stimulus from the pandemic created excess liquidity that raised prices. This inflation has been worsened by supply-reducing factors like the invasion of Ukraine, global logistics issues, and ongoing lockdowns in China. The sharp rise in prices is affecting household disposable income and negatively impacting companies' investment decisions.
• Higher interest rates: To control inflation, the Federal Reserve is raising its reference rate, which increases the cost of credit. This discourages consumption and investment while encouraging savings. Under these conditions, price increases are curbed, and the economy slows. As a result, analysts' projections drop, and so does the stock market.
• Recession fears: Higher interest rates, inflation, and supply problems may limit economic growth in the coming quarters. As a result, the private sector's performance could be severely impacted. Recent earnings reports from major U.S. companies have been below expectations, fueling market fears.

Review of Bear Markets in the 21st Century

• March 2000 – September 2001: The market fell more than 36% over 546 days, accompanied by an eight-month recession in the U.S. The primary factor that led to this situation was the collapse of the dot-com industry (internet-related companies).
• October 2007 – November 2008: The market experienced a nearly 52% drop. The collapse of the real estate market led to the Great Recession. The U.S. GDP contracted for three consecutive quarters, and unemployment rates rose to 10%.
• February 2020 – March 2020: The market suffered a 34% drop, triggered by the COVID-19 pandemic and lockdown policies that contracted global production. However, it was short-lived due to aggressive monetary stimulus.

Some potential strategies to consider during bear markets

In a bearish market, there is no single way to protect your investments and maximize your long-term portfolio returns in Hapi. However, keep in mind that in a bear market, the risk is higher due to increased volatility. As seen in recent months, stock and ETF prices have shown significant fluctuations from week to week, or even day to day.

Short- and medium-term trading strategies

While there are many short-term trading strategies in a bear market that use technical analysis, they require extensive experience and time dedication for success. Some of the most well-known strategies include momentum trading and breakout trading.

Some experts recommend selling and buying back at a lower price (shorting). To reduce risks in this process, the strategy known as scaling out is advisable, where you gradually close out positions and repurchase them later at lower prices.

Long-term investment strategies

Unlike short-term traders, long-term investors prefer to hold onto their assets and wait out the bear market, which is usually shorter in duration than a bull market. Taking a long-term view often yields good results, as stock markets tend to rise over many years.

An effective way to follow this investment philosophy and avoid being scared by market swings is by applying a strategy called dollar-cost averaging. This involves regularly investing a fixed amount (monthly, quarterly, or annually) into your Hapi account, allowing the investor to benefit from the market's long-term upward trend.

Furthermore, since most asset prices have fallen significantly, this presents a great opportunity to add more stocks or cryptocurrencies to your Hapi portfolio. If you compare it to supermarket shopping, a bear market is like a sale where what you're looking for has very attractive discounts. Following that logic, it would be wise to take advantage of this period to invest more. Therefore, if you find that certain assets are on sale, you can buy gradually with a long-term perspective.

Finally, you should keep the following considerations in mind:

• The stocks, ETFs, or cryptocurrencies you choose should be reliable and have good long-term prospects.
• Diversifying your portfolio and favoring higher-quality stocks can help mitigate bear market risks and increase long-term returns.
• Defensive economic sectors (such as consumer staples, utilities, and healthcare) tend to perform better during bear markets.

Conclusion

Beyond adopting a specific strategy, the key is to avoid making decisions based on emotions like panic. Instead, you should seek reliable sources of information and objectively analyze the projections of businesses, cryptocurrencies, and ETFs that you understand best.

Now that you know what a bear market is and the main investment strategies during a bearish market, the next step is to apply your new knowledge by opening an account with Hapi and making your first deposit. If you already have one, what are you waiting for to invest in the New York Stock Exchange on the region’s most reliable investment app? Learn more here.