Bear Market vs Bull Market – How to Invest
To get our FREE investing starter kit (with 5 stocks!) go to https://www.Fool.com/Start
In this video, we break down:
0:13 – What is a bull market
1:33 – What is a bear market
4:02 – Bull vs bear market
The broad definition of a bull market is a sustained period where prices rise — usually months or years. The term is most commonly used in reference to the stock market, but other asset classes can have bull markets as well, such as real estate, commodities, or foreign currencies. Generally when you hear people talking about a “bull market” you can somewhat safely assume they’re talking about the stock market.
Now there isn’t a formal qualification that defines a bull market, and there are several different definitions depending on who you ask.
One commonly accepted definition of a bull market for stocks is a 20% (or more) rise in stock prices, which follows a previous 20% (or more) decline and is followed by another 20% decline. We don’t have to go back too far to see this in action.
Here’s a look at the S&P 500 from the early 2000s to the beginning of the financial crisis.
As you can see in this chart, a bull market in stocks began in 2003 after the dot-com crash bottomed out and the S&P nearly doubled in the years that followed… until the financial crisis where the market fell sharply in late 2008 and early 2009.
Take everything I just said and reverse is and you have the details on a bear market, it’s a period when a market, in our case the stock market, is down 20% or more.
The main takeaway is that bull markets are generally times of prosperity and growth
Bull markets tend to happen during periods when the economy is strong or is strengthening. And often core economic metrics like GDP growth and company profits will be strong, while other metrics like unemployment will trend lower.
One of the best non-numerical indicators is consumer and investor confidence. During a bull market, there is strong overall demand for stocks, and the general “tone” of market commentary tends to be positive.
On the flip side, bear markets are marked by negativity and pessimism. These are generally periods where companies are cutting back, possibly closing locations or laying off workers. As these dominoes start to fall, unemployment can rise, growth can slow (or even turn negative) and investor and consumer confidence can start to wane.
As folks worry about the short-term outlook, they may sell off investments, hoping to avoid losing money or even more money, and as this behavior becomes more widespread, stock prices can plummet.
Where do “bull” and “bear” come from?
Now you might be wondering, what do bears and bulls have to do with stock prices? The term “bear market” is named for the manner in which a bear tends to attack.
Similarly, the term “bull market” is derived from the way a bull attacks its prey. Because bulls tend to charge with their horns thrusting upward into the air, periods of rising stock prices are called bull markets. Unfortunately for investors, bull market periods that last too long can give way to bear markets. And that makes sense, good times generally aren’t sustainable indefinitely, some bull markets end because of large economic issues, some due to irrational exuberance, and some due to bad actors and other factors, but the point is that all bull markets do end at some point.
Likewise, at some point during a bear market, investors will eventually be enticed by low stock prices and begin reinvesting in the market. As trading activity increases and investor confidence begins to grow, a bear market can eventually transition to a bull market.
Based on the history lesson from before and what you may already know about the stock market, you might realize that bull and bear markets are somewhat part of a natural economic flow.
If you take a long historical look, you’ll realize that bull and bear markets are an unavoidable part of how the stock market operates. As we’re recording this video, we’re deep into a bull market and we will inevitably flip to a bear market at some point soon — it’s a matter of when, not if.
Now, that may sound concerning, but if you have the right mindset, it won’t be.
The numbers on bull and bear markets
Investment firm Invesco ran the numbers and from 1957 to 2018, there were 10 bull markets and 10 bear markets. During that period, the average bull market lasted 55 months and gained over 150% and the average bear market lasted just under a year and lost around 34%.
Subscribe to The Motley Fool’s YouTube Channel: