A bull market is a market that is on the rise and is economically sound, while a bear market is a market that is receding, where most stocks are declining in value. Whether we're in a bull or bear market could influence how your stocks perform in the short term. But what about the long term?
Bull and Bear Market Example
The most prolific bull market in modern American history started at the end of the stagflation era in 1982 and concluded during the dotcom bust in 2000. A protracted bear market followed the 1982-2000 bull market. From 2000 to 2009, the market struggled to establish footing and delivered average annual returns of -6.2%. However, 2009 saw the start of a more than ten-year bull market run. Analysts believe that the last bull market started on March 9, 2009, and was mainly led by an upswing in technology stocks.
How do you know when there is a bull market?
Investors typically mark the start of a bull market at the market bottom of a bear market. For example, the S&P 500 reached the lows of the financial crisis in March 2009, so that is considered the start of the bull market that lasted until early 2020.
Bull markets generally take place when the economy is strengthening or when it is already strong. They tend to happen in line with strong gross domestic product (GDP) and a drop in unemployment and will often coincide with a rise in corporate profits. Fueled by the optimism of a bull market, investors continue to purchase under the belief that prices will steadily rise. Investors will be eager to buy securities, while few will be willing to sell.
At a certain point, bull markets will reach what’s known as a speculative bubble. Speculative bubbles are symptomatic of a market that is running more on positive sentiments and speculation than the actual value of assets. Eventually, however, the market bubble will “pop,” prices will drop and the bull market will come to an end.
How do you know if it’s a bear market?
Bear markets are often associated with declines in an overall market or index like the S&P 500, but individual securities or commodities can also be considered to be in a bear market if they experience a decline of 20% or more over a sustained period of time—typically two months or more. The most recent bear market began following the crash of the housing market in 2008.
Bear markets usually happen when an economy slows down or if unemployment rates rise. Times like these can make investors panic. With a more uncertain outlook, investors might start to sell off their investments to try and protect their hard-earned cash. As prices carry on falling, other investors might also get spooked and sell too, creating a dangerous downward spiral.
Bear markets are characterized by people losing their jobs, gross domestic product (GDP) declining, and the stock market losing significant value. Bear markets almost never last as long as bull markets and can create buying opportunities for investors.
Bear markets are closely linked with economic recessions and depressions. Recessions are formally declared when GDP decreases for two consecutive quarters, while depressions occur when GDP decreases by 10% or more and the downturn lasts for at least two years.
Even though bear markets haven’t been as common since the Second World War, it’s estimated investors will live through around 14 bear markets in their lifetime. So it’s important to know how to navigate them, but we’ll come onto that later.
Bull market vs. bear market for investors
Bull and bear markets often coincide with the economic cycle, which consists of four phases: expansion, peak, contraction, and trough. In a bull market, there is strong demand and weak supply for securities. In other words, many investors wish to buy securities but few are willing to sell them. As a result, share prices will rise as investors compete to obtain available equity. In a bear market, the opposite is true: more people are looking to sell than buy. The demand is significantly lower than supply and, as a result, share prices drop.
As an investor, you should always look at the wider market conditions before making any decisions. Whether it’s a bull market vs. bear market could impact your strategy, although there are benefits to investing in both. In a bull market, the ideal thing for an investor to do is to take advantage of rising prices by buying stocks early in the trend (if possible) and then selling them when they have reached their peak. A bear market can be an opportunity to buy more stocks at cheaper prices.
What to do in a bull market or bear market?
Bull stock markets have historically been longer and stronger than bear stock markets. It can be tempting to sell your investments to avoid downturns, but it can be difficult to time it right. Not investing in the stock market, or investing too conservatively during bull markets, can be a missed opportunity to grow your savings.
How to take advantage of a Bull Market?
Investors who want to benefit from a bull market should buy early in order to take advantage of rising prices and sell them when they’ve reached their peak. Although it is hard to determine when the bottom and peak will take place, most losses will be minimal and are usually temporary.
Where should investors put their money in a Bear Market?
Invest in stocks that have value and that also pay dividends; since dividends account for a big part of gains from equities, owning them makes the bear markets shorter and less painful to weather. Some best dividend stocks to buy are Target, AbbVie, JPMorgan, Johnson & Johnson, PepsiCo, Coca-Cola, Bristol-Myers Squibb, US Bancorp, Merck and more.
On the other hand, it is the riskier companies, such as small growth companies, that are typically avoided because they are less likely to have the financial security that is required to survive downturns.
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