Lately, I’ve been thinking: many people are afraid of bear markets, but if you can identify the signs early, a bear market can actually be an opportunity.

First, let’s make it clear what a bear market is. Simply put, it’s when stock prices drop more than 20% from their recent highs—this kind of decline can last for several months or even several years. Conversely, when stock prices rise more than 20% from their recent lows, it’s called a bull market. This logic applies not only to stocks; it’s the same for bonds, cryptocurrencies, precious metals, and more.

Bear market signals usually have a few common features. First of all, of course, is a stock price decline of more than 20%. The standard used by the U.S. Securities and Exchange Commission is that most stock indexes fall by 20% or more within two months. Based on historical data, the S&P 500 has gone through 19 bear markets in the past 140 years, with an average decline of 37.3% and an average duration of 289 days. However, the bear market triggered by the pandemic in 2020 only lasted 1 month, which was an exception.

Bear markets are also typically accompanied by economic recession, high unemployment, and deflation. At this time, central banks generally step in with quantitative easing to stabilize the market, but historical experience tells us that rallies before quantitative easing are often just bear-market rebounds—the real bottom hasn’t arrived yet. In addition, when asset bubbles become especially severe, bear markets are also more likely to occur. The more irrational market investors behave, the more likely central banks are to tighten liquidity to curb inflation, and the market enters a cyclical bear phase.

There are usually multiple reasons that lead to a bear market. Loss of market confidence is common—once people become pessimistic about the economic outlook, consumers hold back, companies cut hiring and investment, and investors start selling assets. Price bubbles are another factor: when assets are pushed up to the point where nobody dares to step in as the next buyer, a stampede effect can cause prices to fall even faster. Financial or geopolitical risks can also spark panic—such as the Russia-Ukraine war pushing energy prices higher, or the U.S.-China trade war hitting supply chains. Central bank rate hikes and balance sheet reductions reduce liquidity, and external shocks such as natural disasters or pandemics can also trigger a market crash.

Looking back at the history of bear markets in U.S. stocks, we can see some patterns. The 2022 downturn was caused by runaway global QE after the pandemic, which led to soaring inflation; combined with the Russia-Ukraine war, commodity prices rose further. The Federal Reserve responded with aggressive rate hikes and balance sheet reduction to fight inflation, and technology stocks were hit particularly hard. The 2020 pandemic sparked global panic, but governments learned the lesson from 2008 and implemented QE immediately to stabilize cash flow—this helped resolve the crisis quickly, and later brought two consecutive years of a super bull market.

The 2008 financial crisis was truly brutal. Starting in October 2007, the Dow Jones fell from 14,164 to 6,544 by March 2009, a decline of 53.4%. The root cause was the low-interest-rate era, when everyone borrowed money to buy homes. Banks packaged loans into financial products and resold them layer by layer; after housing prices climbed to irrational levels, the central bank raised interest rates. Housing investors pulled back, and the resulting chain reaction led to a stock market crash. It wasn’t until 2013 that the index returned to the 2007 high.

The dot-com bubble burst in 2000, ending the longest bull run in U.S. stocks. At that time, many high-tech companies went public, but most had no real profits—pure concept-driven hype. Once some people started withdrawing capital, a stampede followed. On Black Monday in 1987, the Dow plunged 22.62%, mainly due to Federal Reserve rate hikes, tension in the Middle East, and program trading amplifying sell-offs. But this time, the government learned from the Great Depression of 1929: it cut rates quickly and introduced circuit breakers, returning to prior highs in just 1 year and 4 months.

The 1973 to 1974 oil crisis is also worth remembering. After the Middle East war, OPEC imposed an oil embargo, and oil prices jumped from 3 dollars to 12 dollars within half a year. Combined with existing inflation pressures, this led to stagflation—GDP fell 4.7% in 1974, while inflation reached 12.3%. The S&P 500 fell 48% cumulatively, the Dow was cut in half, and the bear market lasted 21 months—one of the longest and deepest systemic collapses in modern times.

So how should you invest when a bear market arrives? First, reduce portfolio risk, keep enough cash, and avoid stocks with overly high price-to-earnings (P/E) ratios and high price-to-book (P/B) ratios, because these assets tend to rise sharply in bull markets but fall even more sharply in bear markets.

If you still want to find opportunities, you can focus on assets that are relatively less affected by economic cycles, such as healthcare stocks. Or look for high-quality stocks with strong competitiveness that have fallen deeply, and enter in stages based on their historical P/E ranges. The key is that these companies must have a moat—competitive advantages that can last at least 3 years; otherwise, even when the economy recovers, they may not be able to bounce back. If you’re not confident about individual stocks, investing in broad market ETFs is also an option, since the market will rebound when the next round of recovery begins.

Bear market rebounds are easy to be fooled by. In a bear market downtrend, a rebound lasting a few days or even a few weeks is called a “bear trap,” and a rise of more than 5% can be considered a rebound. Many people see these rebounds and assume a bull market has arrived, but unless prices rise continuously for several months or move up more than 20% above the lows, it’s still just a rebound. To judge whether it’s a real reversal or a bear trap, you can check whether the trading price of 90% of stocks is above the 10-day moving average, whether rising stocks exceed 50%, and whether more than 55% of stocks hit new highs within 20 days.

In the end, there’s nothing to fear about bear markets. The key is whether you can identify the start of a bear market at the first moment, and then respond using reasonable tools. With enough patience, strict stop-loss and take-profit discipline, and while protecting your assets, it’s possible to find opportunities. Both bulls and bears can make money. When bear market signals appear, it’s a test of your patience and judgment. Adjust your mindset, seize the timing—that is true investment wisdom.