Last Updated on 17 November, 2020 by Samuelsson
In the trading world, almost daily you have to make decisions according to the bearish or bullish trends of the market. The prevailing trend or direction of the market has a major impact on your entire portfolio. As such, you may ask yourself whether stocks can go up in a bear market.
Yes, Stocks can go up in a bear market. Generally, stable companies with good cash flow, such as blue chip companies, have a greater chance of going up in a bear market than less stable companies. However, in a bear market, most stocks still go down.
Just as in a bear market, individual companies could experience an increase in demand, or breakthroughs that make the stock of the company go up. However, the general pessimistic sentiment of the market participants during a bear market will make these reactions less longlived.
Knowing that stocks can go up in a bear market, why not have a closer look at what stocks that typically handle bear markets better than others!
But before that, we will just briefly go into what a bear market is.
Understanding Bear Market
A bear market is a situation in which the market as a whole depreciates. Share prices fall and investors develop negative sentiments about the market and start selling their stocks, which in turn fuels the downturn. The constant decline in the stock market scares investors from putting more money into stocks and keeps it from going up.
A market is called a bear market when the stock prices have fallen 20% from their recent high. Bear market trends generally start when the economy is about to turn into a recession, and therefore are often followed by worse economic conditions.
In those cases when a recession follows a bear market, it is typically lagging by around 6 to 12 months. However, it is important to point out that a bear market not always is followed by a recession. In fact, out of 13 bear markets in the postwar era, only 7 have been followed by a recession.
What Stocks Are Affected?
Depending on what the company is selling and its financial status, a bear market could impact the price of the stock severely, or perhaps not much at all. Let’s have a look at some of the things that could decide how much a stock is affected by a bear market!
Stocks That Get the Most Affected
Stocks of companies that are not stable enough are always risky and more affected by a bear market. These could be stocks of companies that provide products that are not essential in people’s daily lives, and that therefore will experience a sharp decrease in demand as people have less money to spend,
It could also be that some companies are regarded to have weak financials, such as having excessive debts or too small of a profit margin that would make the company lose money in the event of decreased demand.
Stocks That Get the Least Affected
Companies who have financial stability are less affected by the economic downturn. This is because the market is confident that either the demand for the products of the company stays intact, or that it has the financial means to ride out the storm.
For example, companies that are involved in the business of consumer goods including foods and basic life necessities, are less likely to get hit by the bear market. The reason for this is that consumers will continue to consume their product, albeit sometimes in less quantity.
In the case of companies with strong fundamentals and cash flow, these are often referred to as “blue chips”. These are companies that have been profitable consistently for many years, and that are believed to perform well also into the future.
What Stocks Will Go Up During a Bear Market?
Knowing what stocks will go up during a bear market is very hard to predict. However, as we have outlined above, large and stable companies have a better chance of not falling excessively in a bear market. This also makes it more probable that such a company may climb instead of falling, in the event of good news for that particular company.
How to Survive a Bear Market?
In case you find yourself in a bear market, there are several things that you could do to minimize the damage to your stock portfolio. Here comes some great advice!
When you have figured it out that the market has entered a bearish state, the first thing you need to do is to keep calm. There are many ways to get you through this situation, so you just need to calm your nerves before you decide what to do.
The best way of going through a bear market is to stay low during this time and not make hasty decisions. Bear markets are generally for a shorter time period and if you can hold on to it for a little longer, you might get out with a profit!
Turn This into an Opportunity for You
The trick is to be greedy when others are fearful and leaving the market. In this situation, when the stock prices have dropped low, it is a great time to buy large stable stocks. Later, when the market recovers, you can make good money from your investment!
Maintain Your Serenity
In a bear market, most of the investors tend to lose their cool and start selling their stocks. To avoid further losses, they just sell out their stocks at a loss. This is the reason the first rule of trading is to be patient.
The investors not only realize the loss but also create a situation that does not allow the market to recover from the bearish condition.
Balance Your Portfolio
Before making up your investment portfolio, it is always wise to assess the amount of risk you can bear during the course of your investment. According to this, you can balance your portfolio with stable and risky stocks. Balancing the risk factor of your stocks can help you get through bear market conditions since you can choose the amount of risk you are comfortable to take.
If you are near your retirement and don’t want to make a risky portfolio, then go for blue-chip stocks! Or even better, invest in an index fund, and get some really good diversification in order to lower your risk!
Don’t Forget the Bigger Picture
You can survive bear markets only when you fully understand the market cycle. As a trader, you need to understand that bear markets are a normal part of the market cycle. It is wise to be cautious of the declining market but your sight should be clear enough to identify the momentarily dip in the market and not lose a chance to make significant profits in the near future.
As a trader, you need to be able to assess the market beyond its current conditions. For seasoned investors, a bear market is an opportunity to make more money by buying stocks at a discount!
The Bottom Line
Stocks indeed can go up in a bear market, but the general market mood will make this much less probable than in a bull market.
Still, by choosing stocks of companies that have performed well for a long time, you increase your chances of owning stocks that will go well when the bear market strikes again.
If you enjoyed this article you might also like our other articles answering common questions traders have!