Defining a Bull and Bear market
A market that is expanding and where economic conditions are typically favorable is known as a bull market. A bear market develops when the economy is contracting and the majority of the equities are losing value. These terms also describe how investors feel about the market and the resulting economic trends because investor attitudes have a big impact on the financial markets.
A steady rise in prices is a hallmark of a bull market. A bull market in the context of equity markets refers to an increase in the share prices of corporations. Investors frequently believe that an uptrend will last for the long term during such circumstances. In this case, the economy of the nation is normally robust, and employment rates are high.
A bear market, on the other hand, is one that is falling. Unless a market has dropped 20% or more from recent highs, it is typically not referred to as a true "bear" market. Share prices are consistently falling during a bad market. As a result, there is a downward trend that investors predict will continue, which feeds the downward cycle. In a bear market, businesses start to lay off employees, which slows down the economy and increases unemployment.
How are these markets caused?
Bull and bear markets are just reflections of the general upward or downward movement of equities; hence, anything that influences stock prices also affects whether a market is bullish or bearish. The following are some typical market-moving factors that can either cause or reflect bullish or bearish markets:
- Employment: Employment tends to increase during a bull market as businesses recruit more people, but it tends to decline during a bear market as businesses fire employees to reduce expenses.
- Interest rates: In order to boost the markets, the Federal Reserve may maintain low borrowing rates. Alternatively, the Fed might raise rates to make borrowing money more expensive, which would cause the economy to grow more slowly.
- International Investment: An economy might expand as a result of an increase in international investment or demand for commodities from other nations. However, a decrease in foreign investment may harm their economy and stock prices.
- Confidence: The ability to put one's mind over matter. Investor zeal can be a major motivator for purchasing or selling stocks, which affects market movements. Investors will act in ways that could reinforce a trend if they have cash and believe the economy is going in the right or wrong path.
Bull and bear markets can happen to investors. Additionally, there is a continuous cycle of bull or bear markets that are back-and-forth, complementary, and entirely related (you've certainly noticed that bull markets typically follow bear markets, and vice versa). Because investors get emotional, bull and bear markets are the emojis of investing. Investors should try to recognize when this is happening. The key to navigating the stock market is understanding how bull and bear markets reflect positive and negative trends.
Factors to consider with Bull and Bear Markets
Although the movement of stock prices distinguishes a bull market or bear market state, there are some more traits that investors should be aware of.
Securities' Demand and Supply
In a bull market, there is a large demand for securities and a small supply. To put it another way, a lot of investors want to acquire assets, but not as many are ready to sell them. As investors fight for available stock, share prices will increase as a result.
The converse is true in a bear market: more people are looking to sell than buy. Because there is a far greater supply than demand, share prices fall.
Market Psychology
Investor psychology and mood influence whether the market will rise or collapse since the market's behavior is influenced and determined by how people perceive and respond to it. Investor psychology and stock market performance are interdependent. Investors willingly join in a bull market with the expectation of making money.
Market sentiment is negative during a bear market, and investors start shifting their funds from equities to fixed-income instruments while they wait for the stock market to recover. In conclusion, investor confidence is shaken by the drop in stock market prices. As a result, investors hold their money out of the market, which leads to an increase in outflow and a consequent decrease in prices overall.
Change in Economic Activity
The stock market and economy are closely related since the companies whose stocks are traded on the exchanges are active in the larger economy.
A sluggish economy is related to a bear market. Because consumers are not spending nearly enough, the majority of businesses are unable to post enormous profits. The market's valuation of equities is directly impacted by this reduction in profits.
In a bull market, the opposite takes place. People are more ready and able to spend their increased wealth. The economy is boosted and strengthened by this.
Evaluation of Market Changes
Not only does the market's immediate response to an event determine whether it is bullish or bearish, but also how it performs over the long run. Small changes only reflect a trend that is currently in effect or a market correction. Only over a longer time horizon can it be predicted whether there will be a bull market or a bear market.
However, not all market long swings can be categorized as bullish or bearish. A market may occasionally experience a period of stasis while it searches for direction. In this scenario, a string of gains and losses would essentially cancel one another out, creating a flat market trend.
How to Act in Every Market
In a bull market, it is ideal for investors to profit from rising prices by purchasing stocks as early as possible in the trend and then selling them once it has peaked.
Any losses should be brief and minimal during a bull market when an investor can comfortably and aggressively engage in additional equity with a larger chance of profit.
However, because prices are continuously declining in value and the end is frequently not in sight, there is a bigger probability of losses in a bear market. Even if you do choose to invest in anticipation of a recovery, you are probably going to lose money upfront. Therefore, the majority of the profits can be made through short selling or through safer assets like fixed-income securities.
Defensive equities, whose performance is little influenced by shifting market trends, are another option for an investor. Defensive stocks remain stable as a result of economic downturns and upturns. These are businesses that are frequently owned by the government, such as utilities. People purchase them because they are essential regardless of the economy.
Taking a short position in a bear market and profiting from declining prices can also be advantageous for investors. There are various ways to accomplish this, such as selling short, purchasing put options, or purchasing inverse exchange-traded funds (ETFs).
How to approach a Bull vs. Bear market
Buy low and sell high is the best investment maxim. That means you should typically buy in a bear market and sell in a bull market. However, in a bull run, investors sometimes swarm to equity markets and can only sell their holdings at a profit during the following bull run. The majority of the time, investors lose faith and leave the market while it is still in a bear market by taking losses. However, there is a warning: choosing a stock during a down market based solely on price, without investigating the company's fundamentals, can be deceptive.
You need to know if you are catching a knife or a mango when you buy during a bear market. This indicates that when buying a stock in a bear market, one should always choose fundamentally sound businesses; otherwise, they risk catching a stock that is more like a falling knife (example: Kingfisher Airlines).
In 2006, Kingfisher Airlines' stock was trading at INR 76, and in 2007, it reached a high of INR 300+ before falling sharply and never regaining its previous level. A shareholder would have ultimately lost every penny because the stock was delisted on May 30, 2018. This is a classic illustration of a risky investment that caused a lasting loss since basic information about the company was overlooked when the investment was made. Before purchasing a stock, an investor should have ideally determined whether it had been worth it.
On the other hand, ICICI Bank, a corporation with solid fundamentals, might have generated good returns if you had thought about buying it. The price of ICICI Bank reached INR 549.5 in December 2019, plummeted to INR 284 by March 2020, and then slowly increased to INR 674 in February 2021 and INR 841.7 by October 2021. Later, it did decrease to INR 653.8 in March 2022 before gradually increasing once more to INR 747 in April 2022.
Because of ICICI Bank's solid fundamentals, you'll see that its share price has increased steadily over the course of the past year, staying within the 500+ level area. This is the fruit that you would have received if you had seized the chance to purchase it in 2017.
Even seasoned market professionals have difficulty making accurate market predictions for financial purposes. Investors should therefore invest gradually in a calculated manner that prevents them from suffering significant losses in order to get the most out of both stages. The value of an investment would have increased to INR 334 lakh by May 31, 2022, as opposed to INR 141 lakh in Nifty 50, if someone had started a SIP of INR 10,000 in one of the oldest equity mutual funds, HDFC Flexi Cap Fund, in December 1999 and continued investing even during the bearish phases of 2008, 2014, 2015, and 2020.
This is because, over time, the rupee cost averaging the feature's worth increased. No matter the state of the market, an investment of INR 10,000 was made each month in SIP mode, and several units were bought. These increased in value with time. In essence, more units were purchased during the negative periods, while the value increased during the bullish periods.
As long as you invest for the long run, it is, therefore, unnecessary to worry about the stage of the market you are in. Your main goal needs to be that. Markets rise and fall, and there are stages of bull runs and bear times; depending on how you navigate the voyage, you'll either come out ahead or behind.
Were their bull and bear markets historically?
Modern stock market history can be summed up as a series of bull and bear markets, or boom and bust periods where equities, on average, rise by over 20% and subsequently decline by over 20%. While equities have typically risen over the course of US stock trading, there is a continuous cycle between upswings and downswings. Since the end of World War II, investors have enjoyed 11 bull markets, each of which was eventually followed by a bear market.
Recent Bull and Bear markets
Even if bull and bear markets have a long history, the 20th century has already seen a few significant ones. For instance, the 2008 financial crisis was primarily fueled by speculating and unmanageable debt in the real estate market, which led to a sharp decline in the stock market. The S&P 500 lost more than half of its value in a little more than a year, which was sufficient to turn a brief period in the history of the stock market into a bear.
After the financial crisis subsided, the government provided financial institution bailouts, and businesses recover, an economic recovery from the market's low point started in March 2009. (aka a trough). The S&P 500 has tripled in value in the more than 100 months since that time. Over ten years after the peak of the recession, the US saw a substantial bull market that lasted through early 2020. Actually, since World War II, this bull market period was the longest.
The COVID-19 epidemic and the accompanying economic unrest led to an unprecedented decline in the S&P 500 in February and March 2020. However, the S&P 500 rallied, witnessing unprecedented gains, and closed at record levels, thanks to the passage of government stimulus legislation as well as investor optimism. The S&P 500 increased by more than 54% between March and August 2020, continuing its bull market trend.
It is crucial to remember that despite this historic expansion, the US economy contracted in June 2020, according to an official announcement made by the National Bureau of Economic Research (NBER).
Other bull and bear markets to know
Keep in mind the following significant bull and bear markets, as well as some of the factors that fueled them (we'll stick with our S&P 500 example):
- Post-WWII “Peacetime Boom” (Bull): The S&P 500 increased by 85% over the course of approximately 50 months from the end of the 1950s to the beginning of the post-World War II "Peacetime Boom" (Bull).
- The early 1960s (Bear): As the market began to cool off, the S&P 500 dropped over 30% in less than a year. Investors at the time felt that the market had developed too quickly over the preceding ten years.
- Corporate Action in the 1980s (Bull): As a result of deregulation, mergers, acquisitions, and a flurry of market activity, corporate profits more than doubled, driving up the S&P 500.
- 1987 Crash (Bear): The well-known Black Monday crash was influenced by concerns about inflation and automated trading. In the end, the S&P 500 lost a third of its value in a few of months before rising again.
- 1990s Internet 1.0 (Bull): Investment in the first consumer-focused digital enterprises with the introduction of the internet led to the S&P 500 increasing roughly 417% during the decade. This was the most well-known and one of the longest bull runs before the present one.
- 2000 Internet Bubble Burst (Bear): The abrupt market contraction was caused by investors pouring money into companies without the full business strategy. The S&P 500 lost 37% of its value in less than two years as a result of the first wave of internet businesses that had gone public being unable to produce the profits their stock prices suggested.
Why the names “Bull” and “Bear”?
There is much disagreement over how both good and negative market movements came to be represented by such visual mascots. Simply said, nature and human history are the most widely accepted explanations.
The argument of "Nature"
Although we are not zoologists, bulls frequently use their horns to thrust upward whereas bears typically use their claws to push downward. These images have evolved to represent how the market behaves; you can now visualize a mighty bull charging up when a stock is gaining or a potent bear slamming down when a market is falling.
The argument from "History"
This one begins with bearskins—specifically, bear skins, which, along with many other animal pelts, were a booming trade throughout the colonial era. In order to meet demand, traders occasionally sold bearskins that they had yet to acquire. As a result, they would then want a decrease in the price of bearskins since they would need to buy them to fill the orders. Traders came to be known as "bears" because of their desire for a bearskin price decline. Because every "ying" needed a "yang," bulls were the negative bears' polar opposite.
Some people even believe the term has financial roots rather than outdoor ones. The term "bull" may have originated at the London Stock Exchange rather than referring to an animal. London's 17th-century exchange, one of the earliest fully recognized stock exchanges in the modern world, had a board of bulletins that might indicate when a market had improved, and "bull" quickly became shorthand for the idea.
FAQ
How much longer do bull markets last than bear markets?
Bear markets frequently finish quickly. A bear market typically lasts 289 days or roughly 9.6 months. That's much less time than a bull market typically lasts, which is 991 days or 2.7 years. The long-term average interval between bear markets is 3.6 years.
Is it better to invest in a bear or bull market?
Bear markets, which happen when stock values fall 20% or more over a protracted period of time, are the exact reverse of bull markets in that they are driven by pessimism. Bear markets sometimes take place at times of economic downturn and elevated unemployment, whereas bull markets are typically driven by economic strength.
What stocks do well in a bear market?
Consumer staples, utilities, healthcare, and even some real estate equities are examples of sectors that are considered to be defensive and hence have the best bear market stocks.