In the world of investing, the words “bull” and “bear” are often used to describe the state of the market. These words describe how stock markets are doing in general, that is, whether their value is going up or down. As an investor, the way the market moves is a major factor that has a big effect on your assets. So, it’s important to know how each of these market situations may affect your investments.
- A bull market is when the economy is strong and the market is going up. A bear market is when the economy is going down and most stocks are going down in value.
- Even though some investors can be “bearish,” most investors tend to be “bullish.” Over long periods of time, the stock market as a whole has usually shown gains.
- A bear market is riskier for investing because many stocks lose value and prices fluctuate.
- Since it’s hard to know when the bottom of the market will be, buyers may pull their money out of a bear market and sit on it until the trend changes, which would send prices even lower.
Bull Market vs. Bear Market
A bull market is a market that is going up and where things are usually good in the economy. A bear market is when the economy is getting worse and the value of most stocks is going down. Because investors’ feelings have a big effect on the financial markets, these terms also describe how investors feel about the market and the economic trends that follow.
A bull market is when prices keep going up over time. When it comes to stock markets, a bull market is when the prices of company shares go up. When this happens, buyers often believe that the uptrend will last for a long time. In this case, the country’s economy is usually strong and there are a lot of people working.
A bear market, on the other hand, is one that is going down. Most of the time, a market isn’t called a “bear” market until it has dropped 20% or more from its recent highs. In a falling market, the prices of shares keep going down. This leads to a downward trend that buyers think will keep going, which keeps the downward spiral going. During a bear market, the economy slows down, companies start letting off workers, and unemployment goes up.
Characteristics of Bull and Bear Markets
Even though a bull market or a bear market is defined by the way stock prices move, there are a few other things that buyers should know.
Supply and Demand for Securities
In a rising market, people want securities but there aren’t enough of them to go around. In other words, a lot of buyers want to buy securities, but not a lot of them want to sell them. As a result, investors will fight to buy shares, which will drive up their prices.
In a falling market, however, people are more likely to want to sell than to buy. The demand is much smaller than the supply, so share prices go down.
Because how people see and respond to the market affects and determines how the market acts, investor psychology and sentiment affect whether the market will rise or fall. The way investors think and feel affects how the stock market does. In a bull market, people invest freely because they hope to make money.
During a bear market, the market mood is bad, and buyers start moving their money out of stocks and into fixed-income securities while they wait for the stock market to go up. In the end, the drop in stock prices shakes investors’ faith. This makes buyers keep their money out of the market, which causes prices to drop as more money leaves the market.
Change in Economic Activity
Because the companies whose stocks are traded on the platforms are part of the economy as a whole, there is a strong link between the stock market and the economy.
A weak economy is linked to a bear market. Most businesses can’t make a lot of money because people don’t spend nearly enough money. This drop in income has a direct effect on how the stock market prices stocks.
In a rising market, it’s the opposite. People are ready to spend more money because they have more of it. This keeps the business going and makes it stronger.
Gauging Market Changes
The most important thing that determines whether the market is bull or bear is not how it reacts to a single event, but how it does over the long run. Small changes only show a short-term trend or a reversal in the market. The only way to know if there will be a bull market or a bear market is to look at the market for a longer time.
But not all long-term changes in the market can be labeled as either bull or bear. A market may get stuck for a while while it tries to figure out what to do. In this case, a string of ups and downs would actually cancel each other out, leaving the market trend flat.
What to Do in Each Market
In a bull market, the best thing for an investor to do is to buy stocks early in the trend (if possible) and sell them when they have hit their highest point.
During a bull market, any losses should be small and short-term. An investor can usually invest in more stocks with confidence and a better chance of getting a return.
In a bear market, on the other hand, you are more likely to lose money because prices keep going down and you can’t see the end of it. Even if you buy with the hope that things will get better, you are likely to lose money before things get better. So, most of the money can be made by selling short or by making safer purchases like fixed-income securities.
An investor could also choose safe stocks, which don’t change much in value when market trends change. So, defense stocks are stable in both bad and good times for the economy. These are businesses like utilities that the government usually owns. They are things that everyone needs, so they buy them no matter how much money they have.
In a bear market, buyers may also make money by selling short and making money from prices going down. There are several ways to do this, such as short selling, buying inverse exchange-traded funds (ETFs), or buying call options.
Are We in a Bull or Bear Market As of 2023?
The S&P 500 had been in a bear market since June 2022, but on June 8, 2023, after rising 20% from its low point in October 2022, it moved into a bull market. Both the Dow Jones Industrial Average and the Nasdaq are in bull markets, having joined them on November 30, 2022 and May 8, 2023, respectively.
Where Do the Terms Bull and Bear Come From?
People believe that the words “bear” and “bull” come from how each animal acts. Since bulls charge, the name means that the stock market is going up. Bears, on the other hand, sleep through the winter, so bears are a sign that the market is going down.
What Lasts Longer, a Bull Market or a Bear Market?
Bull markets tend to last longer than bear markets, but they can last anywhere from a few months to several years. On average, a bull market lasts for 2.7 years. Right after the Great Recession, from 2009 to 2020, there was the biggest bull market ever. Bull markets also happen more often than they used to.
A bear market, on the other hand, usually lasts less than 10 months, though some have lasted for years. The longest bear market ever happened during the Great Depression and ran for 61 months.
The Bottom Line
Bear markets and bull markets will have a big effect on your investments, so it’s a good idea to take some time to figure out what’s going on in the market before making a decision. Remember that the stock market has always given a good gain in the long run.