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Bull vs Bear Markets & What They Mean for Investors

If you’re curious about investing, or if you’ve ever heard investors talking about how the market is doing lately, you may have come across the terms bull market and bear market. These two phrases describe the way that the market is trending — a bull market is generally trending upward, and a bear market is generally trending downward. 

Whether a particular market (or the economy on the whole) is trending in a bull or bear market direction can have a lot of influence on the way that investors use their money — and it can be a little more complicated than you might think. For an in-depth understanding of bull markets vs bear markets, and how these trends affect the activities of investors, read through our guide.

Here’s what we’ll cover in this article:

Let’s start with a bull market definition. 

What’s a bull market?

A bull market is a sustained 20%(+) increase in stock prices from a recent market low. Bull markets occur when many companies’ equities continue to increase in value over time, adding money to their portfolios and potentially stimulating growth in other parts of the economy. 

When companies are flush with cash, they also often have the capital to hire more employees, so bull markets are sometimes associated with low unemployment, especially if the bear market extends beyond one particular industry or sector of the economy. 

How long does a bull market last?

Of course, all good things must come to an end, and bear markets usually do too. However, bear markets do tend to last a while — about 2.7 years on average. That’s definitely enough time for investors to make smart moves, grow their money, and plan ahead for their next steps. 

It’s also good to know that, in general, the economy has continued to grow over the long term. Market indexes have generally trended upward over the decades, meaning that most of the time, the economy tends to be bearish. (Note that you can also describe investors as bearish when they have an aggressive attitude toward their investments.) 

One thing that’s important to keep in mind, however, is that no one can technically predict how long a bear market will last, so even if the market trends upward in the long term, it’s still possible to lose money in the short term — people do it every day. 

What’s a bear market?

The bear market meaning is when the economy is receding; stock prices begin to fall, and investors become nervous about putting their money on the line. Similar to bullishness, you might also hear people talk about investors being bearish toward certain stocks or the market in general. This means that they sense the uneasiness in the market, and prices may begin to fall.

Opposite to a bull market, bull markets may be accompanied by a rise in unemployment; this is because the stock market declines before a recession, causing companies to tighten their belts and lay off employees that they can no longer comfortably afford. 

It’s important to note that it’s not truly considered a “bear” market unless stocks have fallen 20% or more. For example, the Great Depression & the Recession of 2008 are both extreme cases of bear markets. 

How long does a bear market last?

The time that a bear market lasts can vary. The Depression and Recession lasted years. However, in general, market downturns last about 289 days — just under 10 months. One of the biggest differences when considering bull markets vs bear markets is that bear markets tend to be shorter-lasting. 

For investors who are in it for the long-haul — such as those invested in index funds — it’s usually wise to wait out the bearish market, as bear markets are generally followed by bullish markets once unfavorable conditions have passed. 

However, for short-term investors looking to quickly grow profits, a bear market can be a difficult challenge. During a true bear market, some companies might significantly lose equity value, or may even go out of business completely. This is one of the reasons why investors should assess their risk tolerance before deciding on their investment strategy. 

Differences between bull vs bear markets

As you can probably guess, there are some significant differences between bull markets and bear markets. However, to better understand the conditions that lead to each one — and what to look out for to protect your capital — it’s important to highlight a few of the key differences. 

Supply and demand for securities

Supply and demand are the bread and butter of economics, so it’s good to know how they’re affected by bull and bear markets. In a bull market, there’s a huge demand for equities and securities; investors want to hitch a ride on all the growth companies are experiencing. This leads to a lower supply of stocks, which increases the price. 

During a bear market, supply is high — but nobody is buying. Investors are worried that stocks will continue to depreciate, making them risk-averse and unwilling to bet their capital. Stock prices sink, as there is a greater supply than demand. 

Investors’ attitudes

As mentioned above, bullish and bearish are terms that can be used to describe investors’ sentiments toward the market. You might say that investors have recently been bearish on oil futures, or bullish on software companies. 

But investors’ attitudes also have an effect on the stock market, creating a sort of feedback loop. When the market is in trouble, investors are often unwilling to put their money on the line, creating an atmosphere of doubt. This doubt ends up adding to the decrease in stock prices, as the decrease in demand sends shares’ value tumbling. 

Oppositely, bullish markets inspire a lot of confidence, so more investors are eager to get in on the profits. This also creates a positive feedback loop, and the high demand sends share prices trending upward. 

Indicators of economic trends

The final difference to take note of is that, as mentioned above, bull markets are usually associated with strong economies, and bear markets with economies in trouble. If you hear news of a bear market — particularly a serious bear market — you can be confident that the economy is headed for a rough patch, as the way the stock market performs is generally associated with the way the economy, on the whole, is performing. 

How COVID-19 induced bearish sentiment

Recently, the COVID-19 pandemic caused a lot of bearish sentiment among investors. That’s because, as governments were forced to put restrictions on consumer and business activity, and many people began to lose their jobs, stocks started to depreciate. 

That caused a chain reaction, as more and more investors were afraid of markets crashing even further, and became bearish about their investments. This spiraled, and the Dow Jones Industrial Average dropped over 20% — the worst drop since 1987. 

Since that initial drop, however, recovery has been consistent, and with news of the vaccine becoming widely available in the months ahead, investors are beginning to approach the market with more optimism. 

What should you do in each market?

Here’s the big question: if you’re looking at a bear or bull market, what should you do? Let’s take a look at each. 

Bull market

When the market is trending upward, there are generally two pieces of advice that you might hear from investors:

  • Take advantage of rising prices.
  • Buy stocks early and sell at their peak.

This applies if you are investing in the short term. Note, however, that this is easier said than done. It’s good to remember that all investing comes with some degree of risk. This is why many investors choose to grow money slow and steady using low-risk investments.

If you’re investing for the long-term, it’s usually smart to let your investments appreciate and bide your time until you’re ready to use the money. 

Bear market

Bear markets are trickier, as it’s hard to say what companies may survive and bounce back with new profits once the storm clouds clear, and which ones simply go under — and take your capital with them. However, if you’re investing in the short term, it’s a good idea to research what companies are likely to survive, and only then consider investing in those. 

And remember, there is always a good degree of risk associated with investing in a volatile market

If you’re in it for the long-haul (like an index fund or retirement account) it’s best to avoid panic selling. Chances are, as the history of the stock market has proved, the economy will recover, and your holdings will begin to appreciate again. 

Key takeaways

Here’s what to remember about bull markets vs bear markets: 

  • A bull market is when stocks are going up in value, and often, the economy and employment along with them. They usually last a couple of years.
  • A bear market is the opposite: stocks are losing value, the economy looks uncertain, unemployment might increase. Bear markets tend to last just a few months, but can be longer. 
  • Investor attitudes have a lot to do with the way markets perform — investors might feel bullish, boosting stock prices, or bearish, causing them to decrease. 
  • Ultimately, your investment strategy depends on your personal risk tolerance. However, it’s often wise to buy low and sell high during a bull market, and to be cautious about investing in a bear market, as the risk level is much higher. 

If you’re new to investing, or if you’d just like a helping hand along the way, it’s a good idea to consider Mint investment monitoring. The Mint app allows you to track your portfolio, along with savings, retirement, and other accounts, all in one convenient place. No matter what direction the market takes next, you’ll be able to keep a close eye on your holdings. 

Sources:

Investor.gov: Bull Market, Bear Market | Forbes | CNBC

The post Bull vs Bear Markets & What They Mean for Investors appeared first on MintLife Blog.

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