When you hear the words bull vs bear, the first thing that comes to mind is a dual between the two animals. Bulls and bears are famous for their ferocity, and the thought of such a match is exciting. However, in this case, when we refer to bull vs bear, we are talking about market conditions that can affect your investments.
Bull Vs Bear Market Explained:
What is A Bull Market?
A bull market means that the market is on the rise. It occurs when the major stock markets like Dow Jones industrial average or S&P 500 rise by at least 20% from a recent low. When you hear the term “bull market” in the investment world, it means that the economic environment is growing and thriving. Whatsmore, the unemployment rate is low, and the economy is strong. Such conditions give people the money to invest and encourage investors.
The last bull market started on March 9th, 2009 and went all the way up to March 2020. According to the norm, bull markets usually start after a fall. In 2020, the downturn came about due Covid-19 fears. By April 2020, the stock market started showing signs of improvement.
A bull market can last for a few months or continue for several years. The last bull market prior to Covid-19 hitting, lasted about ten years and resulted in more than 400% stock market growth.
Typically, bull markets last longer than bear markets. Within the last 91 years, bull markets have occurred for 78% of the time.
What Are the Main Signs of A Bull Market?
Some of the key signs to look for are:
Rising stock prices – When the major stocks begin to rise, investors get confident in the market.
High Domestic Product (GDP) – A high GDP is a good indicator that the economy is thriving. This is because a high GDP means that the consumers are spending.
Low unemployment rates – A bull market is an indicator that there are more jobs in the marketplace.
Other notable bull markets that have occurred in the past include:
- Post-WWII – The years during and after WWII experienced bull market conditions. The U.S economy thrived after the soldiers returned from the war.
- The 1980s and 2000 – The stock market rose by an average of 600% during one of the world’s longest bull markets. That’s from 1980 to early 2000.
- Presently – The U.S has been experiencing bull market conditions since April 2020
What Is A Bear Market?
A bear market is the opposite of a bull market. In this case, the market conditions are on the decline. Major share indices like the Dow Jones and the S&P 500 fall by at least 20% from a recent high. The share prices are on a downward trend, unemployment rises, and firms start laying off employees. Such market conditions discourage investors, and most of them opt to sell stocks instead of buying.
There’s another market condition known as a correction that’s not to be confused with a bear market. A correction occurs when there’s at least a 10% fall in shares. But corrections are short-term, and Bear markets tend to be long-periods of negative growth.
Two of the worst bear markets to have ever occurred in the U.S are the Great Depression and the Great Recession. The Covid-19 Pandemic triggered a bear market as the Dow Jones Industrial Average (DJIA) fell for the first time after 10 years. The DJIA was approaching 30,000, but the Pandemic’s impact led to a fall of under 19,000 in a few short weeks. On March 12th, 2020, the S&P also declined, triggering one of the worst bear markets in history.
Some of the key indicators of a bear market are:
Falling market prices – A lot of people hesitate to buy a stock, which presents a great opportunity for a potential investor as prices are depressed.
Job loss – Low employment is solid proof of a bear market.
More “short” stock trading – When investors borrow shares and sell them immediately, hoping to purchase them later at a lower price so they can return them to the lender and keep the difference. It’s a bearish move that benefits an investor.
On a positive note, studies show that bear markets don’t last long. A study by Morningstar revealed that the average bear market lasts for 1.4 years. Whatsmore, the average cumulative loss from a bear market is 41%.
To summarize, a bear market means that the market is down, whereas a bull market means that the market is up.
How Did the Two Market Conditions Get Their names?
The names were adopted from the way each animal behaves. When a bull wants to attack, it squats its legs, swings its head upwards, and positions its sharp horns for the attack. When you observe a bull, you’ll notice that they are lively and ferocious, very much like an experienced investor. The bear, on the other hand, is seen as a “lazy” creature. This is because it likes to hibernate for long periods of time. When a bear attacks, it squats downwards, very much like the downward trend of a recession.
There’s the belief that both terms date back to the Elizabethan period and ancient Rome. In those days, the two creatures were used for bloody bear-and-bull baiting shows where they fought for people’s entertainment. Over time, their association was used to refer to the behavior of the market.
What The Bull & Bear Market Mean to An Investor
It is important for any investor, be it a passive investor, beginner, or an active investor, to understand how the two market conditions affect their investments. Mostly, the two market conditions are characterized by the direction of stock prices. However, there are other characteristics that you should consider.
First, the supply and demand for securities behave differently in each market condition. A bull market has a strong demand and weak supply for securities. What this means is that many investors want to buy securities but are not willing to sell. This condition leads to a rise in share prices as investors compete to obtain the available equity.
However, in a bear market, a high number of investors are willing to sell rather than buy. Share prices drop as more people are willing to sell rather than buy.
Another key characteristic is a change in economic activity. The stock market and the economy are strongly linked because the shares being sold belong to businesses in the market. Since a bear market is associated with a weak economy, most enterprises don’t record huge profits because customers are not spending. The decline in profits affects the market value of stocks.
The reverse occurs in a bull market. People in the bull market have money and are willing to spend it. This, in turn, drives and strengthens the economy.
The bull and bear conditions also affect the investor’s psychology. Since market behavior is impacted and influenced by how individuals discern and react to its behavior, investor psychology and sentiment will affect how the market progresses. Stock market performance and investor psychology are intertwined. Investors have a positive sentiment in a bull market and are willing to invest. Conversely, in a bear market, investors have a negative sentiment and hesitate to invest. Investors move their funds out of equities and into fixed-income securities, as they wait for a positive turn in the stock market.
So what should you do as an Investor?
In a bull market, your best bet is to take advantage of the rising shares by buying the ones on demand and selling them when their prices peak. Losses are minor and temporary in a bull market. Therefore, an investor can actively and confidently invest in more equity with a higher chance of earning a good return.
However, in a bear market, you face a higher chance of incurring a loss. Shares are continuously losing value, and no one can figure out when it will end. If you decide to invest, you are likely to incur a loss before the turnaround occurs. Your safe bet is short-selling and making safe investments like fixed-income securities.
Alternatively, you can turn to defensive stocks in bear market conditions. These are stocks whose performance is minimally impacted by changing trends in the market. As such, they are stable in all economic conditions (be it a boom or a gloom). Defensive stocks come from government-owned industries such as utilities.
The Bottom Line
Both Bull and Bear markets have a significant influence on your investment. Therefore, it would help if you avoided knee-jerk reactions whenever there’s a change in the market conditions. Rather, look at the long-term market performance and gauge it. Small movements in the market are likely to be a correction. On that note, not all long-term conditions signify a bull or a bear market, as there are instances when the market stagnates for a long period of time.
Stagnations are characterized by a series of up and down movements that cancel out gains and losses, leading to a flat market trend. Understanding all of these instances will take time. But in the end, you should remember that history has shown us that the stock market has always bounced back, even though it may take some time. Make sure that you keep your emotions out of the investment to avoid rash decisions in the event of changes in market conditions.
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