Bull vs Bear market: What Investors Should Know

by William Huston, AIF®, AIFA® in FinancePublished on July 26, 2022

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Bull vs Bear market: What Investors Should Know

Regardless of whether you're a small individual investor or a big institutional investor, knowing the difference between the bull and bear markets is very important. Not only does it directly affect your investment assets but also the money that gets into your pocket.

In short, a bull market refers to the stock market condition when it is rising or expected to rise while a bear market refers to the stock market condition when it is declining or expected to decline.

Since the COVID-19 pandemic hit, everyone is concerned about the state of the global economy. With the high inflation rate, sky rocketing fuel prices and food shortages, a lot more people are keen to keep up with current affairs.

With the changing state of the global economy, the stock market volatility is also on the rise. According to S&P Dow Jones Indices, the U.S. stocks took a hit on June 13th 2022 and entered a bear market. This is because the S&P 500 closed after recording a 21% decline.

In this article, we tackle the meanings behind the bull and bear market, the characteristics of each market and how they impact you as an investor or a potential investor.

So keep reading!

Where Did The Terms "Bull" & "Bear" Market Originate From?

You've probably asked yourself, why bull and bear? What do animals have to do with the stock market anyways?

Here's a little background to help you understand better.

The use of the terms bull and bear in finance date back to the 17th century. The terms are thought to have originated from the way that these two animals attack. The bull usually attacks its target by thrusting its horns in the air while a bear attacks its target from the side and strikes its claws down.

These two analogies are used as an indication of the rising or falling of prices in the stock market.

The first recorded case of the use of the term bull with reference to the stock market was made on the London Stock Exchange in 1769. ‘Bear’ was first used in the London Stock Exchange in 1787, eight years later.

The Differences Between A Bull And A Bear Market

A bull market refers to a stock market condition when stock prices are rising or are expected to rise over a sustained period of time. Generally, when markets scale up over a period of time without falling for more than 20% from its previous 52-week peak, that is considered a bull market.

A bear market on the other hand refers to a stock market condition when stock prices have fallen 20% or more from a recent high. The prices of shares in a market are usually dropping continuously.

From what has been witnessed in the past, bear markets can at times be more extreme. For example, during the Great Recession towards the end of the 2000s, market prices dropped by more than 50%. During the Great Depression, things were even worse and prices dropped by a whooping 83%.

More recently when the COVID-19 pandemic hit in 2020, investors experienced a rare occurrence where the market underwent both a bear and bull market in quick succession. In February and March, the S&P 500 index quickly dropped by over 30% in a matter of days. However, within just 33 days of trading, the market hit record highs therefore making it the shortest bear market in S&P 500 history.

It's important to know that typically, bear markets last just about 10 months on average. And so the quick turnaround in 2020 was an unusual occurrence.

Characteristics of Bull and Bear Markets

Although the Bull and Bear markets are mainly characterized by the rising or falling of stock prices, there are other significant characteristics that investors should know about.

Characteristics Of A Bull Market

Supply and Demand for Securities

In a bull market, the demand for securities is high. This is because many investors are willing to buy securities but few of them are willing to sell them. This usually leads to higher share prices as investors compete for equity that's available.

Investor Psychology

The behavior of the market is largely impacted by how people perceive the state of the stock market, and also how they react to the changes that occur.

In a bull market, investors are willing to participate because there is hope of making profits, based on how the market is performing.

For sure, investor psychology and performance of the stock market are mutually dependent.

Boost In Economic Activity

In a Bull market, individuals are bound to make profits at the end of the day. As a result, they have more money and are willing to spend it. This drives and boosts the growth of the economy.

This in turn usually leads to a rise in the GDP.

Stock market performance

The prices of stocks are usually going up and gaining value in a bull market. This leads to an increase in trading activity which results in higher profits.

Unemployment rate changes

The rate of unemployment is lower in a Bull market as businesses in such economies are expanding and hiring new employees.

Rate of inflation

In a bull market, inflation may go up because people's spending power is up and also because of high demand for products and services.

Interest Rates

Lower interests often characterize a bull market. This in turn makes it more affordable for businesses to borrow money and scale their operations.

Characteristics Of A Bear Market

Supply and Demand for Securities

In a bear market, the demand for securities is low. That means that more people are looking to sell rather than buy. Due to the low demand, the price of shares drop.

Investor Psychology

The perception and sentiments of investors in a bear market are negative. As a result, investors start moving their money into fixed-income securities as they wait for the stock market to move in a positive direction.

When stock prices fall, the investors' confidence is low.

Decline in Economic Activity

Businesses whose stocks are trading on the exchanges form part of the greater economy. That means that the stock market and economy are very much interconnected.

In a weak economy, many businesses don't record great profits as the spending power of consumers is low. A decline in profits affects the market value of stocks.

It is important to note that economic recessions and depressions are usually linked to bear markets.

Stock market performance

Declining stock prices are usually linked to a bear market. As a result, there is decreased trading activity which makes the stock market loses value.

Unemployment rate changes

A rise in the unemployment rate is linked with bear markets. This is because businesses in such an economy are not thriving and so there is reduced revenue. This translates to companies hiring fewer people or letting go of others.

Rate of inflation

The rate of inflation in a bear market is often low because of low demand in the market.

However, inflation in a bear market can still occur. Case in point, the rate of inflation in the U.S. is at an all time high of 9.1% due to factors like the COVID-19 pandemic and Russia Ukraine war.

Prevailing interest rates

High interest rates are linked to bear markets. This makes it harder for companies to scale as the cost of accessing loans is now higher.

How should you invest in a bull vs. bear market?

In A Bull Market

Invest in growth stocks as they tend to perform well in a bull market. Growth stocks refer to those companies that investors foresee performing very well because of the potential that they have.

Plan on having a long term investment strategy as companies that have a solid business foundation are likely to companies with great business fundamentals are likely to produce great returns for your portfolio in the long run.

Diversify your geographical holdings so that you also benefit from bull markets in other parts of the world. Also with the rising rates of inflation, allocating a portion of your portfolio to assets like real estate can be a great investment choice.

In A Bear Market

Invest in value stocks as they perform better in a bear market. Value stocks are companies that investors think are undervalued by the market.

Consider increasing your portfolio's allocation to bonds or converting a portion of it to cash. This can be a smart move in a bear market.

Have a long term investment strategy as you are likely to gain more value regardless of temporary prevailing market conditions.

Bottom Line

Having a long term investment strategy will ensure that you gain value at the end of the day. When investing, avoid attaching too much emotion as this can lead to bad decision making when it comes to your investments.

Always do your research before investing your money in any stocks. Evaluate your risk appetite and work with a certified financial advisor who can provide guidance throughout the process.

If you would like to get in touch with one of our qualified financial advisors, contact us here.

Remember, for long term investors, the stock market has always posted positive results.

Bay Street Capital Holdings

Bay Street Capital Holdings is an independent investment advisory, wealth management, and financial planning firm headquartered in Palo Alto, CA. They manage portfolios with the goal of maintaining and increasing total assets and income with a high priority on managing total risk and volatility. Although many advisors may focus on maximizing returns, they place a higher priority on managing total risk and volatility.

Our founder, William Huston founded Bay Street after 13 years of supporting the United States' largest retirement plan ($650B) Thrift Savings Plan. He is recognized as Investopedia’s Top 100 Financial Advisors for 2021. In California, only two black-owned firms out of nineteen firms received this recognition. In Scottsdale Arizona, Ekenna Anya-Gafu CFP, AAMS is recognized among the Best Financial Advisors for his responsiveness, friendliness, helpfulness, and detail. Bay Street was founded to advocate for diverse and emerging fund managers and entrepreneurs. In 2021, Bay Street was selected as a finalist out of over 900 firms across the US in the category of Asset Manager for Corporate Social Responsibility (CSR).