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- A bear market describes a declining stock market of at least 20% compared to its most recent high.
- A bull market describes a period of continuous growth in the stock market of at least 20% and often coincides with a strengthening economy.
- Bull markets are generally a more profitable and less risky time to invest, but investing during bear markets can be beneficial, too.
You may have heard the terms "bear" and "bull" thrown around by friends, family, or coworkers debating the stock market. What do these terms actually mean, and why do they matter?
Understanding investor lingo is key to grasping the market's current tone in order to make smart investing choices. Both bulls and bears are intimidating animals, but in terms of the stock market, you'll generally have luck running with the bulls and keeping your distance from the bears.
What is a bear market?
A bear market is an extended period of time when the stock market falls at a continuous rate of at least 20% compared to its most recent high. As stock prices plummet the economy takes a nose dive, unemployment rates often rise, and corporate profits decline. In short, it's bad news bears.
Unlike stock market corrections (in which there's only a 10% drop) bear markets generally last longer and have a more substantial impact on the economy.
A bear market may be an indicator — but not a guarantee — of a possible recession. But bear markets often go hand in hand with recessions.
"A recession means that the economy is contracting and there is an increase in the number of individuals who would like to be employed but cannot find a job," says Teresa J.W. Bailey, CFP and senior wealth strategist at Waddell & Associates.
One of the easiest ways to follow the state of the market is by tracking major indexes such as the Dow Jones Industrial Average or the S&P 500. If you notice these indexes are on a downward slope, then the market is likely shifting toward a correction or bear market.
What causes a bear market?
A few different factors can cause a bear market, including public health crises, war, geopolitical crises, and major economic shifts. But the most prominent cause is a general weakening or slowing economy. Investors will start selling their stocks as they lose confidence in their current assets.
In 2020, the Dow Jones dropped more than 30% of its value as the first wave of the COVID-19 pandemic struck. With a nearly 40% decline, the economic impacts of the pandemic dethroned the DJIA from its all-time highs.
"The most opportunistic way to prepare for investing in a bear market is to take some of your profits off the table, meaning sell some of your best-performing stocks and keep a bit more cash on the sideline than usual," Bailey says.
How long do bear markets last?
Unlike recessions that persist until the economy bounces back, a bear market only needs to recover by 20% to end. On average, a bear market lasts around 1.3 years as reported by data from the University of Idaho.
A secular bear market — a bear market that sometimes rises only to plummet further — can last between five to 25 years. A cyclical bear market, on the other hand, usually only lasts a few months.
What is a bull market?
A bull market, aka a bull run, is an extended period of time when stock prices increase (usually a 20% increase) compared to its most recent low. As the market shows signs of continuous growth, investors become more optimistic and buy more shares.
"Bull markets happen when the economy is strengthening, and stock prices are rising," explains Bailey. "Bull markets are typically accompanied by a low number of individuals needing employment and investors who are flush with cash to buy into the markets."
Bull markets often indicate a general "up" period in the economy, especially if the business cycle is in the expansion or "normal" phase. GDP increases as consumers increase spending and unemployment rates decline.
"There's high investor confidence. And because of that, people are buying more stock, they're investing in companies, and those companies are showing outsized performance results," says Christian Nwasike principal & executive managing partner at Practice Managemnt Consultants, LLC, and chairman of the board at the Association of African American Advisors (AAAA).
Investors' confidence starts climbing and the overall demand for stocks and similar assets go up. Businesses and companies usually get higher equity valuations, which usually means high levels of initial public offerings (IPOs).
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What causes a bull market?
A bull market occurs when the economy is strong and getting stronger. The economy benefits from higher consumer spending and increased business investments. The more people spend on goods and services, the more money those businesses have to grow their business, create more jobs (which creates more consumer spending), and invest in new technologies.
Other factors that may contribute to economic growth are:
- Infrastructure spending: Local, state, or federal governments spend more money on infrastructure projects. This in turn creates more jobs, ramps up production, and increases business efficiency.
- Tax cuts and rebates: Putting money back in consumer pockets often stimulates the economy as consumer spending increases.
- Deregulation: Regulations restrict businesses and corporations from growing too large. In the 1980s the Reagan administration deregulated several industries, including financial institutions, and many economists consider this to be the reason for the strong economy throughout the 80s and 90s.
How long do bull markets last?
The length of bull markets varies and is often longer than bear markets. On average, bull markets last 6.6 years.
The longest bull market in history was over 131.4 months following the Great Recession. From March 2009 to March 2020, the S&P 500 increased by 400% and gained over $18 trillion in value. The Dow Jones reached a record-breaking 29,551 points.
Bear market vs. bull market
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Why is it called a bear vs. a bull market?
No one can say for sure where the term "bear" came from to describe a struggling stock market, but some etymologists believe it comes from an old proverb that warns folks not "to sell the bear's skin before one has caught the bear." But the animal comparison could also be a way to describe the stagnate and slow actions of pessimistic investors that "hibernate" during a struggling economy.
On the other hand, "bull" is believed to come from the idea that provoked bulls to charge at full speed. Confident investors can't predict where the stock market is headed, but that doesn't stop many from sprinting full speed ahead.
Is it better to invest in a bull market or a bear market?
In general, bull markets are a better time to invest. Yes, stock prices are higher, but it's an overall less risky time to invest. You'll have a greater chance of selling assets for a higher value than when you bought them.
"The markets can be very volatile in the short term," says Nwasike. "It's important to have a long-term perspective."
Investors become pessimistic during a bear market and will avoid buying shares as their equities may start decreasing in value. Prices will drop which can make buying appear appealing, but it can be risky. But depending on your financial plan, it may be worth investing in.
When might it be a good idea to invest in a bear market? "If your financial plan calls for a time horizon greater than a few years for the funds, and you aren't carrying debt with a high rate of interest," Bailey says.
If you're itching to make a move, a bear market can be a great time to diversify your portfolio. You can invest in some less-risky assets like bonds or consider seeking out dividend-paying stocks. Just make sure you don't get carried away.
If you're unsure of your next moves, the best financial advisors can help you make smart investment decisions and give expert advice for short-term and long-term investing goals.
"It's important to spend time with a professional who can chart a plan based on where you are in life and where you want to go," says Nwasike.
Is 2023 a bull or a bear market?
Despite the 2022 lows in which inflation skyrocketed and interest rates dramatically increased, 2023 could be promising. Experts at J.P. Morgan report that after dropping two-thirds of its value in 2022, the ARKK Innovation ETF climbed by 33%, European equities are at all-time highs, and Mega Cap tech stocks are approaching a 50% gain compared to last year. The S&P 500 has jumped nearly 14% since October 2022 and is only 6% away from transitioning into a bull market.
But some investors are predicting cloudy skies ahead with the struggling labor market and higher interest rates in real estate. Plus, the recent bank failures could foreshadow impending troubles for small businesses seeking out credit.
Currently, the S&P 500 market index is a mere 0.3% away from a 20% rise since the bear market low later in October (a 19.7% overall increase) and teetering toward a bull market.
However, on June 1, 2023, the US Senate voted to pass the Fiscal Responsibility Act, which would suspend the debt ceiling through January 2025, and restrict 2024 and 2025 budgets. Financial experts fear that this bill would increase investment volatility and cause a downward spiral in the overall market.
The debt-ceiling raise in 2011 resulted in a 12% plunge in the S&P 500 merely three weeks after the lawmakers issued the bill. A market drop isn't guaranteed if the Fiscal Responsibility Act is put into action but investors fear that borrowing may become more expensive as government spending levels fall.
from All Content from Business Insider https://www.businessinsider.com/personal-finance/bear-market-vs-bull-market
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