How To Identify The Start Of A Bear Market

A falling stock market is called a bear market, and occurs when stock prices are in decline and investors are no longer buying stock or are selling the stock they own.

As a stock market investor, being able to recognise the start of a bear market, or the end of a bull market, is absolutely critical to your success.

If you invest in the stock market at the wrong time, you are likely to purchase overvalued stock which will most likely decrease in value.

However, if invest in the stock market at the right time, you are likely to purchase undervalued stock cheaply and see a good rate of return on your investment later on.

Signs Of An Emerging Bear Market

Below you will find some of the signs to look out for which indicate an emerging bear market.

Stock Market Optimism

When the stock market is doing well investors and stock market analysts can sometimes get a little carried away.

Take Irving Fisher for example, who, as a well known financial expert in 1929, stated that stocks had reached a permanent plateau and that the market will continue to be bullish for the foreseeable future.

A few weeks later however, the stock market crashed and all the investors who listened to Fisher’s advice lost a lot of money.

There were even some economists in 1999 saying the same thing Fisher had just 70 years ago, right before the dot com bust.

So when the stock market is doing well don’t fall into the trap of believing that the good times will never end. A sign of an emerging bear market is very often this false placed optimism in the future.

Usually you will know when this optimism has reached its peak, and therefore a bear market is just around the corner, when you start getting investment advice from friends, co-workers and celebrities on TV.

During a bull market everyone thinks they are an expert at successful stock market investing because their stocks are doing well.

However, it is during this very time that you should be especially cautious about the investments you make and not just take anyone’s advice without researching the fundamentals first.

Debt

When people think the economy is doing well, debt levels tend to hit record highs as people choose to buy luxury items often at the expense of going into debt.

In 1999 for example, just before the dot com bust, debt levels hit highs in almost every category such as in corporate, consumer and mortgage sectors.

The reason that debt is significant in terms of stock market investing, is because when a person accumulates too much debt it can only be removed by repaying that debt or filing for bankruptcy.

So if debt cannot be repaid, the economy and stock market start to fall as there is less money available to spend which in turn affects everyone, consumers and producers.

So the key signs to look out for which could indicate an upcoming bear market are an increase in the number of people filing for bankruptcy and rising national debt.

The Money Supply

When the money supply of a country grows beyond the economy’s needs, you can expect big problems on the horizon.

As more money is pumped into the system, more money is circulated through the banks. This money then flows into investment projects, but due to the abundant money supply, much of it is wasted by people who make poor investment decisions.

The long term effect of this is that it imbalances the economic system, which will eventually lead to economic downturns that can take many years to fix.

Government Interventions

Every economy that has collapsed in the past ultimately did so because of excessive government intervention. In free market economies, this usually occurs in the form of taxes, laws and regulations.

As a stock market investor it is in your best interest to keep an eye on what your government is doing, and whether or not their actions will benefit the economy or harm it in the long run.

War & Conflict

Any significant disturbances to the world order can have a negative impact on the stock market. Look out for possible wars that could occur in the future, as these may signal a downturn in the market.

World conflict can also negatively impact the stock market, so be aware of trade wars, tariffs and boycotts which could affect the value of your investments.