We’ve all heard the refrain Buy Low, Sell High. But beneath this saying is a complex reality that requires a passing familiarity with bull vs. bear markets and their implications. In short, these are terms that describe whether confidence in the stock market is rising or falling.
There is a famous giant bronze sculpture of a bull on Wall Street, but there isn’t a statue of a bear to be found. Still, there can’t be a bull market without a bear market, and smart investors have strategies to plan for and adjust investments during both scenarios. This article will provide an overview of bull vs. bear markets so you may have a more informed conversation with your financial advisor.
What is a bull vs. bear market?
Think about how these animals attack: a bull charges with its head down and brings its horns up, while a bear stands tall and attacks downward. Therefore, a bull market refers to a stock market that trends up, while a bear market refers to one that trends down.
If you look at a chart of the stock market over time, you can see when there were bull markets and bear markets by the upward and downward movement. For example, the years 2007–2009, during the Great Recession, saw a bear market. Whereas the years 2009–2019, despite a few minor corrections, saw a steadily rising bull market.
What is a bull market?
In short, a bull market describes a market that is on a steady incline, indicating investor optimism. While the numbers associated with a bull market vary depending on the analyst, the market is generally said to be in “bull territory” after a 20 percent rise after a drop. A bull market can be an exciting time for investors because it’s when many are making money, and even novice investors can see returns. (But as we discuss later, this can be dangerous.)
The important thing to remember is that the market operates in a cycle: when the market is on a bull run, there is sure to be a bear market lying in wait. Unfortunately, it’s difficult to tell exactly when the market cycle will turn.
What is a bear market?
Conversely, a bear market describes a period when investors are pessimistic about the market. The commonly accepted threshold for a bear market is when there is a 20 percent drop after a recent high. A bear market can be a stressful time for investors, as large sell-offs cause stock prices to go down, and businesses and their investors lose money. Still, there is opportunity to be had during a bear market for those who know where to look—or at least there are ways to minimize risk.
Ideally, the stock market could go up forever in a steady, straight line. But experienced investors know that the market will see corrections, defined as dips of 10–20 percent, or more prolonged bear markets. It’s true that a bear market can be a time of great loss, but low stock prices create new opportunities to buy low. Still, evaluating whether it’s prudent to invest, even at that point, requires a cohesive investment strategy.
The characteristics of bull markets
An investor who can successfully spot the early signs of a bull market could see impressive returns. The problem is that unpredictable world events can shift momentum quickly. And by the time you realize we’re in a bull market, it could already be rounding the corner and trending downward again. Still, one may have a decent shot at timing their investments correctly if they study historical bull markets and watch out for some common characteristics.
Common signs of a bull market
- Low unemployment: Unemployment is one of the key indicators economists look at when judging an economy’s health. When unemployment is low, it means workplaces are hiring; and if they’re hiring, they’re growing; and if they’re growing, their stock prices are going up. If you see this trend at the national level, it may mean we’re in a bull market. By the end of 2019, the unemployment rate was just 3.5 percent.
- GDP growth: A country’s gross domestic product (GDP) is the total value of all finished goods and services produced within that country’s borders. It’s a simple measurement of a country’s economic health. If a nation’s GDP rises, the largest companies within that nation are growing, which is the essence of a bull market. The United States saw 3 percent GDP growth in 2018.
- High investor confidence: Another indicator of a bull market is, frustratingly, intangible. It’s simply how consumers and investors feel about the stock market. If things are going well, it’s easy to think that things are going to keep going well. Investor sentiment is often tied to one of the more objective positive signifiers, but there’s also an element of illogical groupthink to it: if enough people believe something, it becomes true.
When does a bull market occur?
The short answer is that no one knows. The last bull market lasted from 2009 to 2019, and the one before that was from 2002 to 2007. Each of these periods was bookended by a bear market. The onset of a bull market depends on many complex factors, and many people incorrectly guess when a bull market is about to kick off, losing money in the process.
If stocks have been falling for a while, one might suppose it’s only a matter of time before they rise again. The stock market, after all, generally trends upward. But even then, history doesn’t always tell the whole story; investors should make bold moves with great trepidation and at the advice of a CERTIFIED FINANCIAL PLANNER™ professional. We all want to “buy the dip,” before a bull market charges, but what if the dip keeps dipping?
How to identify a bear market
Virtually everyone is a good investor in a bull market, when stocks are mostly green. What separates the amateur investors from the professionals is the level of preparation for and execution during a bear market. But how can you tell whether we’re entering a bear market or if it’s simply a normal market correction?
Signs of a bear market
- High unemployment: When the stock market is high and profits are soaring, companies are more inclined to hire people. Unfortunately, the opposite is true when the stock market is declining, and companies are recording losses. If a company anticipates a poor quarter, whether justified or not, they’re going to be more bearish when it comes to hiring and may even lay workers off, contributing to high unemployment. In April 2020, for example, shortly after lockdowns associated with COVID-19, unemployment reached a high of 14.8 percent.
- GDP contraction: A healthy economy grows a little bit every year. A dip in the GDP growth rate, or heaven forbid, an economic contraction, doesn’t bode well for the market—in fact, the two are inextricably linked. The year 2020 saw a –3.49 percent GDP contraction: another indicator of a bear market.
- Investor pessimism: That intangible factor of investor and consumer sentiment swings both ways. When people perceive the economy to be in poor shape, they’re right. Again, the suggestion of negative news can and often does lead to major sell-offs, creating a chain reaction in which more people sell their stock. To help get a handle on investor pessimism, analysts often look at the Chicago Board Options Exchange (CBOE) Volatility Index, which measures how much volatility professional traders expect to see in the S&P 500 over the next thirty days.
When does a bear market occur?
No one really knows. Few people predicted the collapse of the global financial system in 2008, and no one predicted a pandemic in 2020. One important indicator is that bear markets seem to follow the popping of certain economic bubbles, such as the dotcom bubble at the beginning of the millennium and the housing market bubble in 2008.
To add a few more animals to the menagerie, there will be times when you hear the words doveish and hawkish to refer to analysts who favor lowering or raising interest rates, respectfully, as a means to spur growth or slow inflation. Doveish sentiment may be another sign that a bull market is coming, whereas hawkish sentiment may be a sign that the Federal Reserve is wary of inflation and looking to lower the stock market’s temperature. Still, identifying a momentary correction or a full-on bear market while it’s occurring can be difficult—and getting it wrong can be costly.
How to make long-term decisions based on market sentiment
When you ask whether we’re in a bull vs. bear market, what you’re really asking is, How can I make smart investment decisions? The truth is, it’s possible to see gains in a bear market, just as it’s possible to lose money in a bull market. Smart asset management can increase your odds of seeing the desired result.
Understanding the financial landscape
Think of investing, whether it’s in a bull market or a bear market, as going on a road trip. In preparation for the trip, a novice road tripper might read the driver’s manual for their vehicle and think, OK, I’m ready to go. However, there’s a lot more to a road trip than that: where you’re going, where you’ll stay, what you’ll eat, etc.
This is the same with a novice investor—they might read a few tips on investing and become bullish on their money-making prospects. And for a time, they might be right: but then comes a big correction, or perhaps even a sustained downturn, and they’re in bear territory. A financial planner, however, understands the landscape and what affects markets. They use that knowledge to develop a cohesive strategy on behalf of their clients.
Building a bear-ready portfolio
Ideally, an investor will see substantial returns during a bull market and be able to minimize losses during a bear market. Part of this may involve acting quickly at the onset of an expected bear market, patiently resisting the urge to sell it all when the market undergoes a correction, or building a portfolio that’s well balanced with investments that are less likely to be impacted by a downturn.
Today, popular investing apps simplify participation in the stock market. However, there are times when the wrong knowledge can be more dangerous than complete ignorance. Jumping into the stock market during a bull run can easily give a new investor the wrong impression of what the stock market is, and they get more and more bullish, setting them up for a rude shock when the bear wakes up.
There’s no such thing as a sure thing in the stock market. The best anyone can do is study what has happened before, analyze the current state of affairs, and work with a CERTIFIED FINANCIAL PLANNER™ professional to create an informed strategy for building a portfolio with an optimized risk/return ratio.
Whether you’re new to the stock market or have participated in it for a while, you’ll find that working with a CERTIFIED FINANCIAL PLANNER™ professional can help you see the whole spectrum of asset management. At North Texas Wealth Management, we don’t just help our clients make wise financial decisions; we work hard to ensure our clients’ portfolios match their values.
Is your portfolio bear ready? If not, contact us today to get started on an investment strategy that aligns with your investment goals.