Bear vs. Bull Markets

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7 Minutes Read

What they are, how to spot them, and how to take advantage of them.

 

If you’ve heard the term “bear market” or seen the bull statue on Wall Street, you may be wondering what these animals have to do with investing. 

It makes sense that we use the bear and the bull as symbols for market conditions. After all, both animals are known for their incredible (and unpredictable) strength – kind of like the stock market! 

Knowing what bear and bull markets are is incredibly important, since each one can mean very different things for your investment portfolio. Don’t worry though – we’ve got your back.  Consider this blog your beginner’s guide to all things bear and bull.

 

 

What are bear and bull markets?

 

 

The terms bear and bull are used to describe how stock markets are performing — in other words, whether stock prices are decreasing or increasing in value. Investors can also be called bearish or bullish, depending on their outlook of the market. Basically, if they believe market prices are going to fall they are “bearish” and if they believe market prices are going to rise they are “bullish.”

A bear market is one that’s in decline; it’s characterized by market prices (like those in the S&P 500 market index) falling 20% or more from recent highs. In a bear market, share prices continuously drop, which results in a downward trend that investors believe will continue. This belief perpetuates the downward spiral, since investors are more likely to sell than to buy. During a bear market, the economy slows down, inflation increases, and unemployment rises.

A bull market is the opposite of a bear market. Bull markets show a sustained increase in the stock market as share prices rise. Because investors believe this upward trend will continue over the long term, they are inclined to keep investing (ever heard the term “self-fulfilling prophecy”?). During a bull market, the economy is strong, inflation is low, and employment levels are high.

An easy way to remember these terms is to think about how these animals attack. A bear swipes its paws downward when it attacks and a bull thrusts its horns upwards — resembling the way a market moves. If the trend is down, it’s a bear market. If the trend is up, it’s a bull market.

 

What factors create bear and bull markets?

 

Supply and demand

In a bear market, demand for securities (like stocks or bonds) is significantly lower than supply and as a result, share prices fall. In a bull market, the opposite is true. Demand for securities is strong but supply is weak. In other words, many investors want to buy but there aren’t enough investors willing to sell. As a result, share prices rise as investors compete for what’s available.

 

Investor psychology

Whether the market rises or falls is heavily impacted by how investors perceive and react to the market. Market sentiment — human expectation of future performance — plays an important role in determining its direction.

During a bear market, the outlook is negative and investors lose confidence, causing them to move their money out of the stock market and into safer and less risky fixed-income securities like bonds. This causes stock market prices to decline.

In a bull market, the outlook is positive and investors gain confidence that the market will rise. Investors are more likely to put their money into the market with the hope of making a profit on rising stock prices.

 

The strength of the economy

The stock market and the economy are strongly linked. This is because the businesses whose stocks trade on exchanges participate in the greater economy.

A bear market is associated with a weak economy — businesses aren’t recording huge profits because consumers aren’t spending enough due to poor economic conditions (like high interest rates). The decline in profits directly affects the market value of stocks.

In a bull market, the reverse is true. The economy is usually stronger and people have more money to spend and are willing to spend it. Because of this, businesses report larger profits and the value of stocks increases.

 

How can you tell if we’re in a bear or a bull market?

 

 

Hopefully it’s clear why understanding the characteristics of bear and bull markets is important — it’ll help you determine what to do with your money.

To qualify as bear or bull, a market must have been moving in a consistent direction (either up or down) for a sustained period of time. A bear market happens when market price falls 20% or more from its peak and a bull market happens when market price rises 20% or more from its lowest point. These 20% changes in market price are typically seen on a market index like the S&P 500, which tracks the largest 500 companies in the U.S. 

The direction of the market can only be determined over a long time period – typically two months or more – and it can be difficult to determine when a market is bearish or bullish because of the complexity of the factors involved.

Generally, a bear market has the following characteristics:

  • sustained period of declining stock prices (usually by at least 20% over a minimum of two months)
  • a weak/weakening economy
  • unemployment on the rise
  • declining investor optimism and the expectation that things will be negative for a while (expecting falling prices, rising inflation and unemployment) 

Often, bear markets occur simultaneously with economic recessions because downturns in the economy usually mean market prices fall. This isn’t always the case, but watching for key economic signals like employment and inflation can still be helpful in identifying a bear market.

A bull market usually has the opposite characteristics:

It’s also possible to use statistical analysis and historical data to determine if we’re in a bear or bull market. Sometimes, investors will try to predict when the market will reach its peak or bottom. That’s an ideal time for an investor to enter or exit their position.

 

What should you do in a bear market?

 

 

The chance of losing money in a bear market can be higher than usual because stocks lose value with no clear indication of when the bear market will end. Fear of loss often causes investors to sell off their investments so they don’t lose more money. However, it’s generally recommended that you leave your investments alone for the long haul. Overall, the market trends upwards and will eventually recover. It’s a natural instinct to want to respond immediately but try to avoid knee-jerk reactions.

There’s always the option of waiting for the downturn to subside before buying any stocks, but if you do decide to invest during a bear market, it’s likely you’ll see a loss before the market turns around.

In a bearish market, you can buy stocks, exchange-traded funds (ETFs), and index funds for less. Who doesn’t love a good sale? Taking a passive approach — holding onto those stocks, ETFs, and index funds for the long term — can help because once the market turns around again, prices should rise above the discounted price you paid for them, resulting in a capital gain.

Profit can sometimes be made during a bear market by short selling or investing in fixed income securities (ex. bonds) and defensive stocks.

 

Short selling

Short selling (also called taking a short position) means borrowing shares and selling them in anticipation of the stock price falling more in the future. Warning: this is an extremely risky strategy!

Basically, if the price drops on the borrowed shares you sold, you can buy them back at a discount – and return those shares to the lender. In the end, you profit on the difference between your initial sale and the amount you bought them back for. Short selling is basically the opposite of the usual buy-low-sell-high mentality in investing — a short seller sells high first, and then buys back low. 

The main reason an investor would do this is speculation. If you believe the market is on the decline, you can profit on that belief through short selling — although, again, it’s risky. In traditional investing, because the share price of a stock can only go to zero, there is a limit on how much you can lose — the amount you initially invested. In short selling, theoretically, the share price of a stock can keep rising forever. Therefore, there’s no limit on how much a short seller can lose – you can end up buying stocks back for much more than you sold them for.

 

Defensive stocks

Defensive stocks provide consistent dividends and stable earnings no matter what’s going on with the stock market. These stocks perform well in both bear and bull markets because there is a constant demand for the products and services the companies sell. In periods of high volatility, defensive stocks can help protect an investor’s portfolio because they have low volatility and are able to weather economic conditions.

Defensive stocks include companies selling necessities that people buy regardless of economic condition, like utility and telecommunications companies and companies in the food industry.

 

What should you do in a bull market?

 

 

If you’re aiming to make a profit during a bull market, take advantage of rising prices by buying stocks early in the trend (if possible), waiting for them to rise in value, and selling them when they peak. By doing this, losses should be minor and temporary and an investor can be more active and confident in the probability of making a return. This is called a long position and it’s based on the belief that prices will rise.

It sounds simple, but this strategy involves timing the market — buying and selling stocks based on predictions and forecasts — which is difficult to do accurately and consistently. No one knows exactly when the market is going to rise or fall.

The state of the market will absolutely influence the value of your investments, so it’s a good idea to figure out what the market is doing before putting money in or taking it out.

 

How long do bear and bull markets last?

Bear markets can last from several weeks to several years — the longest bear market was during the Great Depression and lasted 5 years. Bull markets can last months or years, with the longest being over a decade from 2009 to 2020, triggered by the aftermath of the 2008 housing crisis. 

Bear markets tend to be shorter, lasting about 10 months on average, whereas the average bull market lasts about 2.5 years. Bull markets are also more frequent than bear markets – bull markets have occurred for 78% of the past 91 years. 

 

Examples of bear and bull markets

 

Historical bear markets

  • 2000-2002 dot-com crash: The growing use of the internet in the late 90s led to a speculative bubble in technology stocks — there was a steep rise in prices fueled by market sentiment and momentum. After the bubble burst, major indices fell into bear market territory. This period of recession lasted about eight months.
  • 2008-2009 financial crisis: The mortgage crisis of 2008 and the subsequent global financial crisis led to a bear market that lasted 17 months.
  • 2020 COVID-19 crash: The COVID-19 pandemic triggered a bear market after causing economic shutdowns across the world. Because of the intense economic uncertainty the pandemic brought, the stock market fell into bear market territory faster than ever before — however, it was also the shortest bear market after recouping losses in only six months.

Historical bull markets

  • 2002-2007 housing boom: Subprime mortgages allowed many Americans to buy homes with lower rates than they typically would qualify for. The surge in the real estate market led people to spend more — stocks rose 102% between October 2002 and 2007. This bull market contributed to the 2008 crash and subsequent bear market.
  • 2009-2020 recovery: This is the longest bull market in history, driven by slow and steady economic growth after the Great Recession. Much of this growth is attributed to the rise of the tech industry, with companies like Apple, Amazon, and Google becoming some of America’s most valuable companies during this time.

Summary

 

bull vs bear timetable copy


Bear markets can be scary (just like actual bears), but they’re a natural part of the economic cycle and can lead to even stronger market returns. That’s why knowing the traits of these markets is so important — it’ll help you make better, more confident investing decisions.

Melissa Atefi

Author