While commonly used when talking about the stock market, the terms “bear market” and “bull market” are applicable to almost any tradable assets, from currencies and bonds, commodities, and real estate. As prices constantly rise and fall over the normal course of trading, these market terms are usually reserved for trends that cover extended periods of either optimism or pessimism, respectively.
However, speculation and psychology make it difficult to pinpoint and properly define bull and bear markets. And despite investing massive amounts of time and resources predicting the next onset of a or bear or bull market and how long it will last, experts often only recognize which animal’s territory they’re in after they’ve stepped into it.
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The generally-accepted definition coincides with a sustained swing in stock prices of 20% or more, which leads to how these trends were named: bulls attack by charging with horns raised, while bears swing their mighty paws down.
Optimism: Take the bull by its horns
Basically, you have a bull market when overall stock prices are on the rise (or are expected to rise) across the market. When business results are strong, investor confidence grows, and this leads to a greater demand for a limited supply of stocks. These factors together drive stock prices (and potential profits) up.
Expansion and peak
There will always be inherent risks in stock market trading, but these are often outweighed by the potential gains to be won in a bull market. This can be a welcome breath of fresh air after a long stretch of decline or pessimism (a bear market), meaning investors are generally more than happy to let bulls run wild during these times.
In such an optimistic environment, more companies are also emboldened to list themselves through IPOs and people with more disposable income are encouraged to enter trading.
Strategies and signs
The main strategy in a bull market is buying and holding, which means investing in stocks with strong growth outlooks and riding the market’s expansion until it reaches its peak.
And while it will always be impossible to buy at the bottom and sell at peaks, as highs and lows are only evident in hindsight, you can at least be in control of selling when conditions are ideal (at a healthy profit) or at least right (at an acceptable loss).
The key here is recognizing the early signs of this optimistic trend, which include lower unemployment, higher GDP, rising profits, and more IPOs, and deciding on which high-performing stocks to hang on to, and which high-potential ones to grab hold of before they’re priced out of reach.
Pessimism: Beware the bears
In stark contrast to a bull market, a bear market is characterized by widespread pessimism regarding stock market activity, as confidence slows after an extended period of favorable results (a bull market). Weakened confidence leads to several effects down the line that force stock prices to drop and overall business and trading to slow down.
Contraction and trough
Since confidence in a bear market is extremely low, the risks attached to trading stocks are also heightened. Falling stock prices leads investors to sell stock in order to cut their losses, which in turn leads to even lower prices and sell-offs in the panic that follows. Yes, investor expectations can actually affect prices, making this somewhat of a self-fulfilling prophecy.
This said, there is a difference between a market correction and a full-on bear market. Corrections occur when prices drop around 10% within the 2-month threshold, signaling that investors might have paid more than they initially should have and are merely “correcting” for that discrepancy.
Strategies and signs
Some signs of a bear market to watch out for are:
- A sluggish economy
- Higher unemployment
- Lower disposable income
- Weaker productivity
Some investors may see these as prime conditions to “feed the bears,” meaning buying stock when prices are low, which ultimately increases potential profits as markets eventually rebound.
Remember that merely seeing a bear doesn’t place you directly in harm’s way—after all, the only prices that matter are those of stock that you actually own. While the market in general may be in decline, some sectors, industries, or individual companies may still be doing well. So take the time to study your portfolio’s standing within the market and make decisions based on analysis instead of fear.
Bear markets generally last a year and will test your patience—so don’t panic! And bull markets can go on for several years and will test your restraint—so don’t get too greedy!
As in the natural world, bears always go into hibernation, just as bulls eventually tire out, this is the nature of the cyclical market.
As long as you understand how these markets work and build your portfolio guided by careful research and sound judgement, there is rarely anything for long-term passive investors to get too worked up about. Feel free to (cautiously) let the animals go about their ways as you eventually reap the benefits of your investments later down the line.