Whether you’re a seasoned investor or new to stocks, understanding the direction of the market can help you make informed decisions to potentially help protect your financial future. A “bull market” describes a market condition when asset prices are on the rise or expected to grow. In contrast, a “bear market” refers to a down economy or plummeting stock prices.
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What is a bull market?
When you picture a bull, you probably think of a forceful animal lunging forward with its horns held high. So, it’s little surprise that a bull market refers to a market that is on the rise, usually lasting a few weeks, months or even years.
Typically, a market is considered a bull when stock prices rise by 20% or more after a decline. During a bull market, investor confidence and demand for stocks are high — people are optimistic the market will continue to yield strong results for an extended period of time.
What is a bear market?
When a bear attacks, often out of fear, it swipes at its prey in a downward motion. According to one theory, this downward motion is the basis for the name of a bear market — a market that is in a prolonged period of declines in security prices.
Typically, a market is considered a bear when stock prices fall 20% or more. While bear markets are typically shorter than bull markets — usually only lasting weeks or months — they can still significantly impact investor confidence and investment strategies. Falling stock prices, widespread investor pessimism and decreased demand for securities can all be potential recession signals.
Key differences between bull and bear markets
These characteristics can help you differentiate between the two market types.
Bullmarket | Bearmarket | |
|---|---|---|
Supply and demand for securities | Strong demand, weak supply | Weak demand, strong supply |
Investor psychology | Optimism and confidence, people tend to invest more | Pessimism and uncertainty, people tend to invest less and sell more |
Economic activity* | Lower levels of unemployment, increasing stock prices, healthy levels of consumer spending | Higher levels of unemployment, falling stock prices, decreased levels of consumer spending |
*It’s important to note that the stock market is not the same as the economy. While they are strongly linked and certainly affect each other, it’s still possible for stock prices to trend upward while economic output slows and vice versa. That being said, the above characteristics tend to coincide with bull and bear markets.
Navigating bull and bear markets
Both bull and bear markets have risk and potential opportunities – and investors have different strategies based on their perception of the market and potential trends.
Investment strategies for bull markets
The optimal time to take advantage of a bull market is early on, before stock prices have risen to their peak. While it’s impossible to predict exactly when a bull market will reach its height, many investors choose to buy and hold during an upward-trending market, with the intention of selling at a higher price later. Because the market fluctuates during a months- or years-long bull market, some investors might look for periods of pullback or corrections to buy securities at lower prices before they begin rising again.
Having a portfolio with a diversified asset allocation can help protect against overall portfolio risk and market fluctuations.
Investment strategies for bear markets
When an investor is referred to as a “bear,” it means they tend to have a more pessimistic outlook on the market, typically believing the price of a security or index will fall. They may try to profit from declining prices through less traditional investing strategies, like short selling.
The importance of understanding market cycles
Since markets are prone to cyclical behavior, knowing the associated risks and potential opportunities of bull and bear markets can help investors adapt to changing conditions and make informed decisions about their long-term portfolio strategy. Having a portfolio with a diversified asset allocation can help protect against overall portfolio risk and market fluctuations.
Taming the bull and the bear
When looking at market trends and the cycles, it’s important to remember that the market can and will change daily. It’s nearly impossible to predict when a bull will turn into a bear and vice versa. So, whether it’s a current bull market or a bear that seems to be looming on the horizon, it’s often helpful to think long-term, keep the big picture in mind and stick to an investment strategy that aligns with your goals and risk tolerance.
