“Bull market” and “bear market”— two terms you’ve probably heard tossed around before but may not completely understand. Whether you’re brand new or an experienced investor, it’s good to review how both market types work. So next time you hear news anchors debating, “Are we in a bull or a bear market?” you’ll be able to form your own opinion.
What is a bull market?
The best way to understand a bull market is to visualize a bull charging toward its target. The bull is strong and confident. Though no one knows for sure, a “bull market” likely gets its name from the upward motion of a bull’s attack. During a bull market, equity (stock) prices are on the rise.
Characteristics of a bull market include:
- Stock prices are climbing. Typically by at least a 20% increase over a two-month or more span, measured by a broad market index like the Dow Jones Industrial Average or the S&P 500.
- Investor confidence is usually high.
- It often coincides with a strong national economy.
So what happens during a bear market?
Continuing the “animal analogy,” a bear market is named after the way a bear attacks its prey as well — with a forceful, downward swing.A bear market is commonly marked by falling stock prices.
Characteristics of a bear market include:
- Stock prices are declining. Marked by a 20% or more decrease (over 2+ months) from previous highs. This is also measured by a broad market index like the Dow Jones Industrial Average or the S&P 500.
- Investors often feel panicked and pessimistic.
- Often the general economy of the country (or at least the economic outlook) isn’t good.
Are we in a bull or a bear market?
Good question. U.S. stock indexes entered a correction (a fall of 10% in the market) in March amid fears of the impact of COVID-19 on the global economy. Many experts had been anticipating, if not predicting, a correction (even before COVID-19), leaving some to believe we were better prepared for it.
As of June 9th, we’ve experienced a wavering of back and forth, or more aptly down and up, from bear to bull market for some time.1 With each bit of positive news — government stimulus checks and packages, COVID-19 research developments, the loosening of social restrictions and the reopening of local economies — there’s been a positive response in the markets.
For some investors, this rollercoaster activity has created opportunity. And for others, heartache.
The only thing you can control is your reaction.
From an investor’s point of view, a bull market can be a dream come true. However, depending on where you are in your retirement savings journey, a bear market could potentially create new investment opportunities. If you’re wondering, ‘how could a bear market ever be good for me,’ consider the following scenario. During a bear market, stock prices usually drop. So you may be able to purchase new stocks for less, potentially growing the size of your investment portfolio.
That said, with the drop in stock prices, it could also impact the stocks in your portfolio. It’s important not to “panic-sell” your portfolio during a market downturn which locks in your losses and may cause you to miss out on the possible market recovery.
This is why Financial Advisors suggest you create an investment plan with a risk level that you can live with. From there, it’s best to try setting investment goals and contributing to them on a regular basis.
Understanding market trends like bull and bear markets is crucial for investors. The bull market, characterized by rising stock prices and high investor confidence, is like a charging bull, strong and optimistic. Typically, it sees at least a 20% increase in stock prices over a few months, aligning with a robust national economy.
Conversely, a bear market resembles a bear attacking its prey, marked by falling stock prices, a decrease of 20% or more over a similar period, and a sense of panic and pessimism among investors. This often correlates with a struggling economy or a negative economic outlook.
Analyzing the current market scenario can be complex. For instance, the U.S. stock indexes underwent a correction in March due to concerns about COVID-19's impact on the global economy. Since then, there have been fluctuations between bearish and bullish trends, responding to various factors like government stimulus, pandemic developments, and economic reopening.
Investors should grasp that while a bull market seems ideal, a bear market might offer opportunities. In a bear market, stock prices drop, allowing investors to potentially purchase stocks at lower prices, expanding their investment portfolios. However, reacting emotionally, like panic-selling during a market downturn, can lead to locked-in losses and missed recovery opportunities.
Financial advisors recommend creating an investment plan aligned with one's risk tolerance and establishing investment goals while consistently contributing to them. This strategy helps navigate both bullish and bearish market conditions, ensuring a balanced approach to investing despite market fluctuations.
