Basics of Bear Markets

What is a bear market?

While analysts are not in complete agreement, one
generally accepted definition of a bear market in stocks is a price decline of 20%
or more over at least a two-month period. By comparison, a "market correction"
is usually defined as a sudden, sharp decline in stock prices that may last only a
few days or weeks. A prime example of a market correction occurred in July
1996 when the Standard & Poor's 500 Composite Stock Price Index, a widely
accepted benchmark of the broad stock market, lost about 7% of its value in a
two-week period. 

Bear markets also strike bonds. The most recent bear market in the
fixed-income market started in 1993, when surging interest rates sent bond
prices (as measured by the 10-year U.S. Treasury bond) tumbling 17.9% over a
13-month period. Bond prices and interest rates are inversely related: As interest
rates rise, bond prices fall, and vice versa. Numerous factors affect the general
level of interest rates, including Federal Reserve policy, inflation rates, economic
growth, and, more importantly, investors' expectations regarding these factors and
others.