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The terms bull market and bear market are used frequently in financial news media to describe stock market conditions. But just because financial experts use the terms doesn’t mean everyone knows what they mean. Read on to find out more about the difference between bull market and bear market and what’s behind them.
What Is a Bull Market?
A bull market is one where stocks are rising or are expected to rise in the near future. The term bull market is generally linked to a prolonged stock market rise rather than a short quick increase that is part of a cycle of common market volatility. There is no set benchmark, but an increase of at least 20% is generally considered a minimum level for a bull market.
Depending on whom you ask, the most recent bull market for stocks began in March 2009 on the heels of a steep decline in the wake of the financial crisis. That bull market ended in March 2020 as the economic impact of COVID-19 hit stocks. And then stock values picked back up again.
It is not uncommon to see a bull market for stocks following a period of sharp declines in the stock market. This is very logical, as investors are taught to try to buy low and sell high to the extent that they can.
There is no exact answer for what causes a bull market. Investor psychology is always a factor in any sort of market activity. That’s why we recommend beginners consider using a financial advisor (find one using Paladin Registry). Beyond that, a strong economy and a high level of employment are often factors that propel the stock market.
What Is a Bear Market?
Most people define a bear market as a market that experiences a decline of 20% or more. A bear market decline is generally measured in terms of a major market index like the Dow Jones Industrial Average or the S&P 500.
There can be a number of causes behind a bear market. A large, sudden drop in the market as a whole, or even just one segment of the market, can snowball into a panic. And that panic causes a full-blown bear market.
- Bear markets are generally tied to a slowdown in the economy. As an example, take the bear market of 2008 that was tied into the financial crisis of that period.
- Historically there have been 14 bear markets since 1929. These ranged in length from three months to 61 months. The amount of decline experienced by the S&P 500 index ranged from 20% to 86% over the course of these bear market declines. The worst in our century was the 2008 bear market. It lasted for 17 months and had a drop of 59%.
Characteristics of Bull and Bear Markets
A bull market and bear market are different, But they also have similarities. Here is a look at some of the features and characteristics of each type of market.
Supply and Demand for Securities
The stock market works a lot like basic supply and demand economics.
- In a bull market there is generally a stronger demand for securities than the supply available for investors. Maybe more investors wish to hold on to their stocks as they see stock prices rising.
- In a bear market, it’s usually the opposite. There are fewer buyers of stocks than there are investors willing to sell their shares. This oversupply results in downward pressure on stocks.
Investor psychology differs greatly in bull and bear markets. It’s often said that fear and greed are the two biggest drivers of the stock market. These emotions are on full display during bull and bear markets.
- Investor sentiment and psychology are generally positive during a bull market. Many investors might even get swept up in this positive sentiment and buy stocks for fear of missing out. This psychology feeds into itself and can contribute to the length and breadth of the bull market. Greed is on full display here.
- In a bear market, we generally see just the opposite in terms of investor psychology. Many investors sell shares out of panic. Once the bear market momentum starts, this fear often feeds on itself. Investors see what’s happening with stocks and some rush to sell their shares for fear of seeing their investments experience a drastic drop in value.
Change in Economic Activity
Bull and bear markets in part reflect the economy in the country and are outgrowths of that activity.
- Bull markets are generally associated with a strong economy. As business conditions become more favorable, companies experience growth and become more profitable. As the economy moves toward full employment, people generally have more money to spend. This helps fuel the economy and helps drive stock prices higher.
- A drop in economic activity is often one of the drivers of a bear market. A slowdown in the economy leads to job losses. This means consumers have less money to spend. Companies experience a slowdown in sales and profits shrink. This fuels lower stock prices, and the bear market snowballs.
What to Do in Bull and Bear Markets
As an investor what should you do in a bull or a bear market? The answer depends upon your individual and unique situation of course. Here are some thoughts for investors to consider:
Should You Buy in a Bull Market?
The answer depends. Ideally, if you can buy at or near the start of a bull market you stand to see your holdings increase in value, potentially leading to some sizable profits.
Unfortunately, some investors see the rising stock market and choose to buy in after much of the gains have been made. They often buy at or near the top of the market. This limits their opportunities to profit and exposes them to the risk of losses due to a market decline.
Should You Buy in a Bear Market?
Intuitively it seems to make sense to buy during a bear market. If prices are dropping, you are buying low. However, prices can continue to drop. And that means investors need to hold on to those shares and resist the temptation to sell out of fear as prices continue to decline.
How Do Bull and Bear Markets Compare Historically?
- Since 1929, there have been 14 bear markets. The average amount of decline is 39%; the average length of a bear market is 22 months, and the average return for the year following the low point in the bear market is a gain of 47%.
- There have also been 12 bull markets since 1932. They ranged from 131 months for the bull market that ended in February 2020 to a low of just over 25 months. The biggest gain for a bull market as measured by the S&P 500 was 417% for the bull market that ended in March 2000. The smallest of these bull markets, which ran 26 months from October 1966 to November 1968, showed a gain of slightly more than 48%.
Keep Calm and Invest On
Both bull and bear stock markets happen frequently over time. Be prepared for both.
Panic buying or selling is generally not a good idea. Instead, focus on your long-term investment objectives and adjust your portfolios as appropriate. Instead of thinking about the now, think about your risk tolerance and investing time horizon.
Just as a bear market ends, a bull market begins, and the cycle starts all over.
Written by Roger Wohlner.
View the original article at here.