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by Jonathan AnthonyBull vs. Bear Market | Defining Both With Everything You Need to Know
In finance, you will often hear the names “bull” and “bear” describe certain market conditions. For example, you may have heard that the U.S. has been in the bear market territory for most of 2022. But what do these large animals have to do with investing, and how often do they rear their heads?
Let’s look at bull markets vs. bear markets and see what kind of impact they can have on your investment portfolio.
What is a Bull Market?
When a market is “bullish,” it is typically either rising or expected to shortly. Generally speaking, market observers will call it a bull market when markets rise and continue to without falling more than 20% from a previous 52-week high.
What is a Bear Market?
A “bearish” market is one that is in the process of consistently falling for an extended period. A market is officially a bear when conditions are falling or expected to fall by 20% or more from its previous 12-month peak.
Factors That Define Bear and Bull Markets
The first part of 2022 has been a US market bear, and it doesn’t seem like there will be much reprieve in the near future. Some experts are even predicting that there will officially be a recession within the first two quarters of 2023.
Several things determine whether or not a market is heading into bullish or bearish territory. Everything from supply and demand, sharp changes in economic activities, and investors’ psychology and emotions will directly affect the market’s direction. Take a closer look at some common factors that affect the market below.
Market Bubbles
A bubble is the rapid increase of market value immediately followed by a sharp drop in value, often referred to as a “crash” or “the bubble popping.” Bubbles are often surges in asset prices, typically driven by erratic market behavior.
Assets are typically traded at far higher price ranges than usual during a bubble, far exceeding their actual inherent value. Bubbles are usually only identified after they burst and a massive price drop occurs.
Tulip mania in Holland from 1634-1637 is one notable example of a bubble bursting. A more recent example is the 2008 housing crisis.
Inflation
Production costs, supply and demand, and monetary policies all affect the price of goods. Inflation is when prices rise. There is some expected and average inflation over time, but sharp increases can be problematic.
Price inflation influences both bull and bear markets and vice versa. During a bull market, when the economy thrives, production might increase, and people could buy more or have extra money to spend, slowly driving prices to creep upward.
Consumers tend to dial back spending in a bear market and get a bit more conservative. Shrinking demand can cause rapid deflation in extreme cases.
War
According to a 2015 Swiss Finance Institute study, in cases with a well-known “prewar phase,” any increase in the likelihood of war tends to decrease stock prices. However, if a war breaks out, their price will increase. On the contrary, when war erupts as a surprise, the initial outbreak decreases stock prices.
This phenomenon is “the war puzzle,” and there is no apparent reason for the behavior. Overall, U.S. markets tend to stay steady during wars. From 1939 to 1945, during World War II, the Dow was up more than 7% per year and 50% in total.
World Events
World events such as natural disasters, terrorism, and civil unrest can affect markets. 9/11 had a direct effect, as many investors chose to trade less and choose more conservative investments.
Indirect influence also regularly happens in markets in response to world events. For example, in response to military actions abroad or civil unrest, the stock prices of military equipment and weapons manufacturers will likely rise due to defense contracts.
Current Interest Rates
Lower interest rates are typically associated with bull markets, while the opposite is true about bear markets. Higher interest rates slow companies’ expansion and growth, putting less money in investors’ pockets. On the other hand, lower interest rates make it more affordable for businesses to borrow money and increase their production and growth strategies.
Overall Sentiment or Emotion
Human psychology plays a significant role in the price of stocks, with investor sentiment and emotion being a sizable factor in the market’s overall direction.
In bull markets, investors are much more eager to participate in trading and take more risks to earn a profit. People will buy new technology, make stock gamble plays, and hold positions longer during upward trends.
In a bear market, when the sentiment is less optimistic, investors tend to transfer their money from equities to fixed-income securities as they wait out the downturn. These downturns in stock prices cause hesitation and doubt, leading investors to pull their money from the market, which causes a general price decline.
A History of Bull vs. Bear Markets in The USA
Both bull and bear markets are cyclical economic events that have happened many times throughout U.S. history. Analyzing their history can help to make better investment decisions, regardless of the current market trends.
US Bull Market History
Bull markets take up much more time than their bear counterparts and are much more robust. The average bear market decline has been 27%, while the average bull market gain has been 167%. Since World War II, there have been 13 bull-bear cycles in the U.S., with the average bull market lasting 1,630 days and the average bear market lasting only 419.
It has taken the economy an average of 26 months to recover from a bear market. However, it has historically recuperated just fine and has rebounded even stronger each time.
US Bear Market History
Bear markets are diverse, if anything, varying in severity, length, and impact. Between the end of World War II and April of 2022, there have officially been 14 bear markets. Based on historical Bloomberg data, their severity fluctuated from a 51.9% drop in the S&P 500 to a 20.6% decline.
Bear markets can occur broadly over entire markets or just in particular sectors. Economic activity is a cyclical series of bull and bear markets. Over the long term, bull markets have gone higher and lasted exponentially longer than bear markets.
How Frequent Are Bear Markets?
Famous examples of bear markets include the dotcom crash (2000-2002), the stock market crash of 1929, and the bear market following the housing market crash (2007-2009). A recession often accompanies these bear markets, although this is not always the case. Of the 25 bear markets in the U.S. since 1928, only 14 have seen recessions, while the other 11 did not.
What Do Investors Do in Bull Markets vs. Bear Markets?
Savvy investors should seek to take advantage of the rising prices in a bull market by regularly purchasing stocks and selling them off to actualize their profits. Losses in a bull market should be less severe and fleeting, as investing in equities when the market is bullish should equate with a higher probability of profit.
It’s difficult to escape drops in your portfolio during a bear market. Losses will be more common, and timing the end of the bear market will likely be tricky. Because of this, short selling becomes a more attractive option. Although many investors simply elect to put their money in safer investments, such as bonds and other fixed-income securities.
Dividend Stocks Can Hedge Your Losses
Many investors also turn to dividend stocks, whose performance in the market is typically affected less by changing trends. These industries, often things like utilities, are designed to be excellent hedges against inflation and are stable in both bull and bear markets.
The Long Game Investors Don’t Deviate From the Plan
The market is ever-changing. It can be volatile or steady, and everything can change overnight. Because the market changes so much, plenty of stimuli may sway an investor’s choices, making them deviate from their plan.
Buy-and-hold investors have a set amount they invest on a schedule. They do not deviate from that plan, regardless of world events and how they affect the markets. These types of investors are playing the long game. They are looking at their investments for years and decades rather than the volatile daily or monthly life occurrences.
Don’t Navigate Bull or Bear Markets in the Dark
Investing takes time, knowledge, and experience. All of that can be costly, even for investors that have been following the markets for years.
StockMarketEye is a stellar way to follow your investments, regardless of the type of market. You can also stress-test your portfolio against potential market conditions and compare your standings against historic market numbers of the past. This design allows the software to tell you if you beat the average, fell short, or are about par for the course.
The longest bull market was from 2009 (after the housing collapse) until 2020 when the COVID-19 pandemic hit and tossed everything out of whack. Over those 11 years, a 30-year-old investor might have only experienced growth and profits since before they could order a drink in the bar.
Were you ready for the current bear? Do you have a plan in place for a possible upcoming recession?
