An Overview of Bull and Bear Markets

The names “bull” and “bear” are widely used in the financial industry to describe market circumstances. The general performance of stock markets, as measured by their rate of growth or decline, is described by these phrases. The market’s trend is a crucial factor that may make or break your investment portfolio. Thus, it is crucial to comprehend the potential effects of current market circumstances on your assets.

MAIN POINTS

• A bull market is when the economy is doing well and stock prices are going up, whereas a bear market is when the economy is declining and stock prices are going down.
• Some investors may indeed have a “bearish” outlook, but the vast majority are more likely to have a “bullish” one. On average, the stock market has produced positive returns over very long periods.
• Many shares are losing value, and prices becoming erratic makes investing riskier in a bear market.
• Price declines more if investors pull money out of a bear market and stay on cash until the trend reverses, which is difficult to predict.

Bull Market vs. Bear Market

• A “bull market” is one in which prices rise and economic circumstances improve. Conversely, when the economy is contracting and most equities are falling in value, we have a bear market. Due to the strong impact of investor sentiment on the financial markets, these phrases may also be used to describe the mood of the investing community and its outlook on future economic developments.
• Steady price increases characterize bull markets. A bull market is a period of rising stock prices in the equity markets. When this occurs, it’s common for traders to assume that the upward trend will continue for the foreseeable future. The economy is booming, and the number of people working in the nation is large if this is the case.
• A declining market, or a bear market, is the opposite. Typically, a “bear” market is defined as a 20% or more decline from recent market highs. Consistently falling stock prices characterize a bear market. The resulting downward trend is, therefore, widely anticipated by investors, who fuel the cycle by acting on that expectation as firms cut back and lay off employees, the economy contracts, and the unemployment rate increases during a bear market.

S&P 500 Bear Markets and Recoveries

Characteristics of Bull and Bear Markets

Stock price movements are the most obvious indicator of whether the market is bullish or bearish. Still, other indicators may help traders prepare for the inevitable ups and downs.

Supply and Demand for Securities

High investor demand and little available stock often characterize a bull market. The demand for securities far exceeds the supply, meaning that most investors would want to purchase, but only some are doing so. Because of this increased demand for equity, share prices will rise.

Contrarily, in a bear market, more individuals are eager to sell than to purchase. As a result, stock prices fall when demand falls short of supply.

Investor Psychology

• Investment psychology and mood play a role in determining the market’s direction since the market’s trajectory is influenced and affected by how people perceive and respond to it. The state of mind of stock market investors directly impacts market performance. Bull markets include enthusiastic participation from traders who anticipate a gain.
• A bear market is characterized by pessimistic market sentiment, during which time investors begin moving their money away from equity investments and into fixed-income instruments while they wait for the stock market to rebound. When stock prices fall, it causes a lot of anxiety among investors. Because of this, investors are hesitant to put money into the market, which leads to a general decrease in price.

Change in Economic Activity

• The stock market and the economy are intertwined because the companies whose shares are traded on the exchanges are active players in the latter.
• A bear market often accompanies a sluggish economy. Consumers need to spend more, making it easier for firms to turn a profit. This drop in profitability negatively impacts the stock market’s perception of companies.
• The opposite is true during a bull market. People with more disposable income tend to spend more of it. This is the engine that keeps the economy running and strengthens it.

Gauging Market Changes

• The market’s long-term performance, rather than its immediate response to the news, is the most critical factor in determining whether it is bullish or bearish. Even if the market has a little drop, it is merely a short-term trend. Longer time frames are necessary for predicting market cycles like bull runs and bear markets.
• Even said, not all prolonged market fluctuations can be classified as either bullish or bearish. Indecisiveness might set in when a market searches for its footing. A flat market trend would arise from a succession of up and down movements that balanced each other out.
• Attempting to time the market ideally is a Herculean task.

What to Do in Each Market 

• An investor may make the most of a bull market by purchasing equities at the beginning of the upswing (if feasible) and selling them when they have reached their top.
• During a bull market, an investor’s losses are likely to be small and short-lived, and they may comfortably put money into further shares of stock with a more considerable expectation of a positive return.
• However, losses are more likely in a bear market since prices are steadily falling with little sign of a rebound in sight. You will almost certainly incur a loss if you choose to invest in the expectation of a future gain. This means that the best opportunities for making money lie in short selling or more stable assets like fixed-income securities.
• The investor may protect their portfolio with defensive stocks when the market is volatile. For this reason, defensive stocks are reliable throughout economic downturns and expansions. Utilities and other state-owned companies fall under this category. As a result, consumers will always find a way to afford them since they are necessary.
• Additionally, in a bear market, investors may gain by taking a short position and making money off of declining prices. Among the many methods available, short selling, investing in inverse ETFs, and purchasing put options are all viable choices.

The Bottom Line

• Your assets will be significantly affected by both bear and bull markets. Therefore, it’s essential first to assess the current state of the market. Then, remember that the stock market has consistently produced good returns over more extended time frames.