As you continue on your investment journey, you’ll likely come across the terms a bull market and a bear market. You might be left wondering what is a bull vs bear market?
Although their names may both represent fearsome animals, each represents a different set of economic conditions.
Today we will take a closer look at exactly what the difference is between a bull and bear market. In addition, we'll go over how each market type could affect your financial situation.
What is a bull market?
A bull market indicates that the market is rising. The general atmosphere of the economy is optimistic and businesses seem to be growing well. Overall, you can expect the stock market to continue rising throughout a bull market.
The U.S. Securities and Exchange Commission defines a bull market as a period of time when there is a market rise of 20% or more in broad-based market index funds for at least two months. A 20% rise may seem dramatic, but it indicates that the economy is truly doing well.
One example of a bull market is the post-World War II boom in the 1940s and 1950s in which the US economy grew dramatically. A second example that is more familiar is the bull market that started in March 2009 and has continued until very recently. During that time, the market grew by around 500%.
What is a bear market?
A bear market, on the other hand, is the exact opposite of a bull market. Instead of a rising tide, the market will fall to dramatic lows. You can expect a pessimistic atmosphere about the economy and less confidence in the market.
The U.S. Securities and Exchange Commission defines a bear market as a period of time when there is a market drop of at least 20% over a two month period.
Two of the worst bear markets in history resulted in the Great Depression and the Great Recession. With cumulative market losses over 50% in both cases, there were lasting effects on the economy for years to follow.
What are the main differences between a bull vs bear market?
Now that you know a little bit about bull and bear markets, it is time to point out the major differences. We will take a closer look at the factors that continue to these market types below.
Real gross domestic product, GDP, is a solid indicator of both bull and bear markets.
If the GDP is rising, then it likely indicates a growing economy in which consumers are spending freely. With that, you can expect to see a bull market.
If GDP is falling, then it could wreak havoc on the economy. A drop in GDP could be the result of several factors but it leads to a decrease in consumer purchasing power. With fewer consumers spending money, you can expect to see a bear market.
A quick indicator of a bull or bear market is to take a look a the stock market trends.
If stock prices are rising, that shows that people are confident in the market’s ability to grow. Generally, that indicates that the market is heading into a bull period.
If stock prices are plummeting, then a faltering market could indicate a bear market is just around the corner. With fewer people willing to buy stocks, a bear market could last for a while.
The economy is built on the jobs that people work all around the country. Not surprisingly, unemployment rates are very closely tied to the market’s performance.
If unemployment levels are very low, that means that there is growth in businesses across the country. With more people at work, you can prepare for a bull market. More people will be able to work during a bull market because there are plenty of jobs available.
If unemployment rates rise quickly, that is a strong indicator of a bear market. When businesses are forced to layoff employees due to a struggling economy, it can make it difficult to get out of the bear market.
A final indicator to look at is the strategy that most investors are pursuing.
In a bull market, most investors are working with a long-term investment strategy. They expect that stocks will continue to grow and the investor wants to buy and hold for the long haul.
In a bear market, more investors are considering a short-term investment strategy. Many choose to sell shares in order to buy the stocks again at a lower price. However, this doesn’t always work out if the investor times the market poorly. Timing the market, it is not a good idea as most people are unable to make accurate predictions.
How do bull and bear markets impact you?
If you have chosen to invest in the stock market, then a bull or bear market could impact your finances. The impact of a market swing on your personal portfolio will depend on the length of the bull or bear market. Plus, the types of stocks that you have in your portfolio.
The thing about a bull or bear market is that no one can predict when they will arrive or how long they will stay. For example, it could last a decade like the latest bull market that started in March 2009 or it could last a few months.
Likewise, bear markets can hang around for years. For instance, the stock market crash that started in 1929 and lasted until 1932 or they could vanish within a few months.
Although the big swings in the market can be scary, the market has continued to rise through the years. If you take a look at the stock market index for the last 100 years, you’ll see that it has risen dramatically in that time period. It can be a bumpy ride along the way, but so far the market continues to improve its performance over the long term.
The biggest impact these market types can have on your financial picture is when choose to sell. Investors stand to lose money on their portfolio when they panic during a bear market and sell off their stocks.
Although it can be scary, the best thing to do is simply hang on to your investments and wait until the next bull market arrives in order for your investments to recover.
Should you invest in a bull vs bear market?
You should invest in both. It is likely that you will run into several bull and bear markets over the course of your investment career. When a bear market rears its head, that should not change your market strategy.
If your goal is to build a long term investment portfolio, then investing your money into the market over the course of decades is the strategy that seems to work for most average investors that don’t have hours each week to delve into specific stocks. With that, you should continue to invest in both bull and bear markets according to your personal risk tolerance.
A bear market can be an opportunity to build your wealth because you are able to buy lower and the next bull market should grow your investments. However, there is no guarantee that your investments will grow within the timeline you desire so it's important to have a long term outlook.
As a reminder, trying to time the market is never a good idea. Just keep investing according to your personal risk tolerance and stick to your plan.
If you want to learn more about investing and building your personal investment plan, then check out our free course. It will guide you through the creation of your personal investment strategy.
The bottom line
Bull and bear markets are a part of the life cycle that every investor faces. You should expect to encounter several in the coming decades.
The key is to stick to your investment strategy for the long term. Don’t waver from the course that you chose to follow in less stressful times. Keep your risk tolerance in mind and move forward in both bear and bull markets.