You often hear about the bulls and the bears in the stock market. Nobody knows for sure why these two creatures became the mascots of the market, and there seems to be no pinning down the first mention of them in this context.
The most widely accepted reasoning has to do with how the two beasts attack. Bulls thrust their horns forward and up and bears use their claws to swipe downward.
It’s important that you understand the terms, regardless of why they’re used. The differences between bull markets and bear markets and how you invest in them could mean the difference between profits and losses.
Bull vs. Bear Market
Experienced investors know that bull markets and bear markets are normal cycles and prepare for them through diversification. Some assets perform better in bull markets while others fare better in bear markets.
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What exactly are the differences between the two markets these seasoned investors are preparing for?
What Is a Bull Market?
Investors say the market is bullish when market conditions are positive. During these times, stock prices are headed up and are likely to continue. Investors typically consider the market to be in bullish territory when benchmarks like the S&P 500 market index and Nasdaq composite index rise by 20% or more from previous lows.
Bull markets are the upward side of the cycle; they always follow and are followed by bear markets.
For example, when the Great Recession hit the global economy in 2008, the market fell dramatically. Conditions in the market started to pick up as soon as the economic outlook started to improve. By mid-2009, benchmarks had bounced back more than 20% from their most recent bottoms, signaling the beginning of a bull market that would become one of the longest-running bull markets in U.S. history.
What Is a Bear Market?
Bear markets are periods when share prices are trending down and are expected to continue to struggle. This shouldn’t be confused with a market correction — a short-term, yet significant downturn in prices.
The market is considered bearish when it has fallen at least 20% from recent bull-market highs. Bear markets can be triggered by a wide range of events, like overvaluations due to market bubbles, Federal Reserve interest rate changes or quantitative tightening, or economic and geopolitical concerns.
Although few market participants enjoy a bearish run, they don’t last long. Moreover, savvy investors who keep their finger on the pulse of the market are often able to turn lemons into lemonade when the market turns sour.
Differences Between Bull & Bear Markets
There are several differences between bearish and bullish financial markets, and although many of these differences are related to stock prices, many others have nothing to do with Wall Street. Check out the chart below to find out more about the differences:
| Bull Markets | Bear Markets | |
| Stock Direction | Like the strike of the bull, stock prices in bull markets head in the upward direction. | Like the strike of a bear, stock prices in bear markets head downward. |
| Investor Confidence | With prices trending up, investor confidence is at its highest in bull markets. | As investors begin to lose money, their confidence dwindles in bear markets. |
| Economic Conditions | Bull markets are the result of positive economic conditions. Consumer spending is high, leading to increasing corporate profits. Economic expansion is all but guaranteed. | Bear markets are often the result of an economic slowdown. Bear markets take hold as corporate profits dwindle. With dwindling profits, corporations freeze hiring and may initiate layoffs. |
| Gross Domestic Product (GDP) | When corporate profitability is climbing, consumers are spending more, and stocks are headed up, GDP tends to head in the same direction. | During bear markets, consumers spend less and corporations produce less. As a result, growth in GDP stalls and often heads in the wrong direction. |
| Investment Opportunities | Investors tend to look toward growth stocks when overall market prices are headed up. Tech stocks are a prime example of a bull market play. However, investing in undervalued companies during these times has the potential to generate meaningful profits too. | There are plenty of investment opportunities in bear markets as well. Look for low-volatility, non-cyclical stocks in the health care, energy, defense, and consumer staples sectors to protect your portfolio and outperform the overall market when the bears have control. |
| Duration | Bull markets last an average of 3.8 years, but some can last far longer. | The average bear market lasts under a year. |
| Inflation | During bull markets, economic expansion is in full swing. Consumers are spending money and corporations are generating profits. As demand for goods climbs, prices begin to rise. | During bear markets, the economy is typically under pressure. Consumers start spending less money, leading to demand destruction and slowing inflation. In some cases, this process can lead to lower prices and a potential economic recession. |
| Employment Data | Demand is climbing and corporations need to produce goods and services on a larger scale. They do so by hiring more, leading to lower unemployment rates and better employment data overall. | Corporations produce less as demand dwindles. With less production required, employers freeze hiring or lay off employees, leading to higher unemployment rates and poor overall employment data. |
What to Do in a Bull vs. Bear Market
Many long-term investors don’t give the cycles of the market a second thought. They know it’s impossible to know when the cycles will take place and that making emotional moves in the midst of a changing market can be a dangerous concept.
These investors follow the same strategy whether the bears or the bulls are running, knowing that they maintain a diversified portfolio designed to meet their long-term financial goals. They also know that the recovery following bear markets is often worth the wait.
Nonetheless, there are plenty of investors who don’t have it in them to just sit around and watch their portfolio ebb and flow. What do you do as the tides shift?
What to Do in a Bull Market
When the market is trending up, it’s time to rebalance your portfolio with a slightly larger appetite for risk. Look for cyclical assets known for producing higher returns when economic conditions are positive. In particular, focus on growth stocks in sectors like tech and mix things up with a few smaller companies with excellent future prospects.
No matter how good the market seems to be going, don’t forget your due diligence. There are losing stocks even in bull markets; you don’t want to dive into one simply because you didn’t do your research.
Keep your portfolio allocation balanced and diversification a top priority. Things may be going great right now, but the bears can take hold at any time.
What to Do in a Bear Market
When you’re staring a market downturn in the eyes, the first idea that might come to mind is “I’m going to run to my brokerage and sell everything.” That can be a big mistake.
The first thing you should do is calm down. Keep in mind that the market is a cyclical beast and the bears will run from time to time. There’s never been a bear market in history the market didn’t recover from, and this one’s not likely to be any different.
It’s time to think logically. What strategies can you use in a bear market?
First, rebalance your portfolio, making sure you have a fair allocation to safe-haven asset classes. Next, look into your stock holdings and compare how each investment has done. Consider selling the losers for tax-loss harvesting and practicing dollar-cost averaging to add more shares of the winners to your portfolio while they’re on sale.
Also, keep in mind that past performance isn’t always indicative of future results. Stocks that haven’t performed well in your portfolio during bull markets may be gems in bear markets. Consider why the losers have lost and whether t it’s a good idea to keep some around considering current market conditions.
The bottom line here is that investing in any market is about making educated investment decisions. Instead of running for the hills in bear markets, look for opportunities to take advantage of discounts and adjust your portfolio to stocks that are likely to produce a profit while the market is generating losses.
Final Word
The market has been on a wild ride lately. Investors have seen bull and bear markets all in the span of a couple of years. The COVID-19 pandemic put an end to one of the longest-running bull markets in U.S. history. The Federal Reserve reacted with lower interest rates and quantitative easing, while the government responded with stimulus payments directly to households.
These moves quickly pushed the market back into bull market territory but threatened significant inflation. At the same time, geopolitical tensions around the world led to further inflation and consumer concerns.
The Fed responded with higher rates and quantitative tightening, pulling money out of supply to dampen inflation as the market continued to freefall. By mid-June 2022, the S&P had fallen over 20% — in the territory of the bears.
But there were still opportunities. Stocks like Lockheed Martin and General Dynamics were enjoying double-digit growth while the overall market experienced double-digit losses. The same can happen in your portfolio whether you’re running with the bulls or guarding against the bears. Follow economic conditions, do your research, and make wise decisions with your portfolio, and you can come out ahead regardless of the state of the market.
Joshua Rodriguez
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