How do you define bear and bull market? How can you tell which one you are in? In this blog post, we’ll explore the characteristics of each market and explain how to spot signs that indicate whether a bear or bull market is predominant.
Understanding the difference between a bear vs. bull market can help you make informed investment decisions and better protect your assets.
Key Points
- Why Is It Called Bear vs. Bull Market?
- Bear vs. Bull Market: How Do They Differ?
- Stock Market Performance
- Gross Domestic Product
- Unemployment Rates
- Inflation Rates
- Interest Rates
- Consumer Sentiment
- How to Invest in a Bull vs. Bear Market
- Key Takeaways
Why Is It Called Bull vs. Bear Market?
Most people have heard of bull and bear markets, but only a few know the origin of these terms. “Bear” and “bull” come from the way animals attack their opponents—a bear will fall down while a bull raises its horns into the air. Similarly, these terms relate to how the market moves.
In fact, you can talk about a bull market when the trend is up. The opposite of the bull market is commonly known as the bear market—here’s when the trend falls down.
Historically, intermediaries that sold bearskins would speculate about the future cost of these skins from the trappers and hoped they would drop. This way, vendors would highly benefit from the difference between the cost and selling price, known as spread. In this context, the intermediaries became “bears”—short for bearskin jobbers. Bulls, on the other hand, were thought to be opposites of bears due to the popular bull and bear fights.
Bear vs. Bull Market: How Do They Differ?
Now that we’ve explained the origins of the terms bear and bull markets, let’s take a closer look at their most notable differences.
Stock Market Performance
When it comes to bull vs. bear stock market performance, you should first look at the prices. While stock prices are generally falling in a bear market, that’s the opposite for a bull market.
This is because investors tend to be more pessimistic in bear markets and more optimistic in bull markets. When optimism is high, investors are more likely to buy stocks, increasing the prices as a result. However, a pessimistic approach leads investors to sell stocks and, therefore, drive prices down.
Gross Domestic Product
Whether it’s nominal or real, the gross domestic product (GDP) measures the total value of all goods and services produced in an economy over a specific period of time.
In general, GDP growth is seen as a sign that an economy is healthy and expanding. In bear markets, this measurement tends to be low or negative, while in bull markets, it’s typically high.
Unemployment Rates
Unfortunately, unemployment tends to rise in bear markets as businesses cut back on hiring and workers lose their jobs. In bull markets, however, unemployment falls as businesses expand and create new jobs.
Inflation Rates
Inflation rates are higher in bear markets as demand for goods and services decreases and businesses raise prices to offset their losses. On the other hand, this rate is much lower in bull markets—and here’s why. The bull investor expands and produces more goods and services, increasing competition and lowering prices.
Interest Rates
In bear markets, interest rates tend to rise as businesses cut back on lending and investors seek safe-haven investments. Bull markets have lower interest rates as businesses expand and borrowing becomes more attractive.
Consumer Sentiment
Consumer sentiment measures how confident investors feel about the economy. In bear markets, consumer sentiment tends to be low as consumers become more pessimistic about the future. Clearly, investors in bull markets have a more optimistic outlook.
How to Invest in a Bull vs. Bear Market
When it comes to investing, timing is everything. If you buy into a company just as its share price is about to take a nosedive, you could lose a lot of money. On the other hand, investing at precisely the right moment can lead to big profits. So, how do you know when to buy and when to sell? One way to make this decision is by considering whether the market is in a bull or bear phase.
Bull investing happens when the economy is doing relatively well. During this phase, it’s generally a good idea to buy stocks because they are likely to continue increasing in value. However, you also need to be aware that bull markets don’t last forever. Eventually, the bubble will burst and share prices will start to fall.
In contrast, a bear market occurs when the economy is struggling or there’s negative expected growth. In a bear market, you might want to sell your stocks because they are likely to continue to lose value. Like the bull market, bear markets don’t last forever either. Eventually, the market will rebound and share prices will start to rise again.
Key Takeaway
- The main difference between bear and bull markets is the direction of stock prices. In bear markets, stock prices are falling and investors are pessimistic about the future.
- As opposed to bear markets, stock prices in bull markets are rising, and investors feel optimistic.
- Gross domestic product (GDP), unemployment rates, inflation rates, interest rates, and consumer sentiment are all key indicators of bear vs. bull markets.
- When it comes to investing, pay special attention to the timing. You need to know when to buy and sell to make money in the stock market.
Frequently Asked Questions
Is it better to buy in a bull or bear market?
Clearly, investing in the bull market offers plenty of benefits, including employment opportunities, increased GDP, and higher interest rates. Although bear markets allow investors to buy stocks at lower prices, this procedure is hazardous and causes significant losses if it doesn’t work out.
If you’re investing for the long term, buying during a bear market may be a good idea since you’ll be able to purchase assets at a discount. On the other hand, if you’re looking for more immediate gains, then buying during a bull market may be the way to go. Of course, timing is notoriously tricky, so it’s important to consult a financial advisor before making any major decisions.
How long can a bear market last?
On average, bear markets last more than a year—388 days, to be precise. The longest bear market recovery time known to date can be dated back to the early 2000s when stocks took 929 days to reach their lowest point. On the other hand, 2020 saw the shortest cycle—only 33 days.
So, it’s safe to say bear markets are difficult to predict. They tend to happen when there is an economic recession or political turmoil.
How do you profit from a bear market?
When the stock market crashes, it can be hard to know what to do with your investments. However, there are still opportunities to profit from a bear market—here’s how.
One way to profit is to short-sell stocks. This involves selling shares you don’t own and hoping the price falls so you can repurchase them at a lower price.
Additionally, investing in put options gives you the right to sell a security at a specified price within a specific timeframe. If the security price falls, you can exercise your option and sell it for a profit. Finally, you can also invest in inverse ETFs, which are designed to track the movement of the stock market in the opposite direction. So, if the stock market falls, your investment will go up.
How do bull and bear markets impact investors?
Understanding the difference between the bear vs. bull market is essential for any investor, as they both can significantly impact them.
In a bull market, investors may be more likely to take risks and invest in growth stocks, expecting prices to continue to rise. On the other hand, in a bear market, investors may become more conservative, choosing to invest in defensive stocks or cash equivalents.
