A bear market is born when the prices of securities drop at least 20 percent and stay down for several months. The term can be used to describe specific sectors but is typically used to describe the market as a whole.
A downturn in economic conditions will affect every business within the economy; however, small businesses may feel the effects sooner and to a greater extent. As such, it’s even more important for small-business owners to pay attention to money management when the economy is sluggish. Without the proper considerations, a small business can experience severe and lasting consequences from a bear market.
Investing During a Bear Market
For those looking to save for the twilight years, bear market retirement investingcan be difficult. As stock prices fall, it may be tempting to sell stocks in an attempt to cut losses; instead, you should stay focused on investing for the long term, especially when the market dwindles. It is still possible to get long-term gains if you leave your money in the market and reinvest all dividends and interest earnings. Some get scared and pull out when prices start to fall, and then wait too long to reinvest, possibly losing the chance to take full advantage of a market recovery. It’s in these times that consumers become particularly nervous about spending.
Sales During a Bear Market
Since trends in the market typically lead the economic cycle, a bear market can have a significant impact on your small business. When the prices of securities are falling, consumers who see their retirement portfolios diminish in value are less likely to spend money on items they view as non-necessities. Most businesses are unable to record large profits when consumers do not spend enough. The more severe the market downtown, the more your business is likely to be impacted.
Tip: One way you can overcome the slack in consumer spending during a bear market is to reframe your business to make yourself more valuable to your customers. Forbes contributor Moira Vetter suggests, “Think about the challenges your customers are trying to solve and shape your offerings accordingly.” Become a necessity that your customers just can’t live without, even during an economic slump.
Debt During a Bear Market
Usually when your income falls, your expenses do not follow suit. Many business owners use credit to fill in the gap while they wait for sales to increase again. This can lead to high debt levels that can be difficult to pay down even when the market recovers.
Tip: Don’t drown yourself in debt. If sales fall in a bear market, attempt to adjust your expenses to match your income before you apply for a new line of credit. Additionally, in a bull market, it may be tempting to take out new loans to grow your business; however, you should avoid borrowing more money than you would be able to pay back if the market subsequently slowed. If you aren’t sure that you could still repay a loan if sales shrank and expenses rose, seek other sources of funding.
The Good News
The average bear market lasts only 19 months, according to the Leuthold Group. When the market is in a downturn, you may feel like the decline will last forever, but Wall Street always rebounds—even after the Great Depression, when stocks dropped to only about 20 percent of their value. If you can keep your business afloat during a bear market, you will surely thrive when the market bounces back.