what is the difference between bull and bear market

It’s easy to interpret the two terms as they are essentially opposites of one another. During a bear market, which is a steep drop in stock prices, you’ll typically also see low investor confidence and a perception that the market is risky. In a bull market, which is a continued rise in stock prices, you’ll likely see high investor confidence and a perception that there’s a strong economic environment.

High employment rates, high gross domestic product, and other measures of economic well being and stability are generally thought to correlate with bull markets. In a bull market, the ideal action for an investor is to take advantage of rising prices by buying stocks early in the trend (if possible) and then selling them when they have reached their peak. Because the market’s behavior is impacted and determined by how individuals perceive and react to its behavior, investor psychology and sentiment affect whether the market will rise or fall. In a bull market, investors willingly participate in the hope of obtaining a profit. The length of bull markets varies, but they are often longer than bear markets. Bull markets often indicate a general “up” period in the economy, especially if the business cycle is in the expansion or “normal” phase.

On the other hand, “bull” is believed to come from the idea that provoked bulls to charge at full speed. Confident investors can’t predict where the stock market is headed, but that doesn’t stop many from sprinting ahead. Regardless of the current state of the stock market, it’s important to stay focused on the long-term prospects of the companies in which you are invested. Companies with great business fundamentals are likely to produce significant returns for your portfolio over time. The U.S. stock market was in a bullish mode after recovering from the 2008 financial crisis until pandemic-related uncertainty caused a market crash in 2020. The chart below shows that, aside from minor market corrections, a bull market persisted for more than a decade.

Motley Fool Returns

what is the difference between bull and bear market

As for which investing strategies to employ, different sectors tend to outperform over various periods in a bull market. Early on, cyclical sectors like financial stocks and industrial stocks tend to outperform as they are most sensitive to interest rates and economic growth. While bull markets generally don’t cause people too much stress, bear markets often inspire anxiety and uncertainty. How you should handle a bear market, though, is dependent on your investment timeline. A bear market is when stock prices on major market indexes, like the S&P 500 or Dow Jones industrial average (DJIA), fall leveled reading library for kids k by at least 20% from a recent high.

So, in that sense, markets can charge higher, wildly and with great power, just like a bull. But declining markets can seem like a ransacking bear on the loose in a town — they destroy everything and make people lose confidence. Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.

what is the difference between bull and bear market

The bear market occurred during what some referred to as the worst economic downturn since the Great Depression of the 1930s. In this article, we’ll explain bull markets and bear markets, the differences between them, and what they mean for everyone—not just stock traders. Understanding investor lingo is key to ultimate swing trading strategies guide 2021 grasping the market’s current tone and making smart investing choices.

  1. Price inflation may be a problem when the economy is booming, although inflation during a bear market can still occur.
  2. Both bear and bull markets will have a large influence on your investments, so it’s a good idea to take some time to determine what the market is doing when making an investment decision.
  3. Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator.

Bear market vs. bull market

GDP increases as consumers increase spending and unemployment rates decline. In other words, bear markets can lead to opportunities for long-term investors to put money to work. This is not unlike those folks who buy up real estate during slumps in the housing market. But this lousy performance might be considered “bearish” over a much shorter period, such as one quarter. The longest bear market took place shortly after the dot-com bubble, lasting from 2000 to 2002.

Unemployment rate changes

As an investor, the direction of the market is a major force that has a huge impact on your portfolio. So, it’s important to understand how each of these market conditions may impact your investments. He has been writing on stocks for over six years and has also owned his own investment management and research firms focused on U.S. and international value stocks, for over 10 years. In addition, he worked on the buy side for investment firms, hedge funds, and investment divisions of insurance companies for the past 36 years. Lately, he is also working as Chief Strategy Officer for a tech start-up company, Foldstar Inc, based in Princeton, New Jersey. “Defensive stocks will lose ground in a bear market, but tend to lose less than average, supported by steady demand for their products and, often, generous dividends,” write Smith and Burrows.

In contrast to the bull market, the SEC defines a bear market as a time when stock prices are declining and market sentiment is pessimistic. Generally, a bear market occurs when a broad market index falls by 20% or more over at least a two-month period. At the most basic level, a bear market describes times when stock prices fall, and a bull market is when they’re going up. While this may make the two seem like mirror images, bull and bear markets are not simply the same phenomenon in reverse.

The history of bull and bear markets

If the stock market is bearish, then you can consider increasing your portfolio’s allocation to bonds or even converting a portion of your portfolio into cash. You can also consider geographically diversifying your holdings to benefit from bull markets occurring in other regions of the world. Price inflation may be a problem when the economy is booming, although inflation during a bear market can still occur. High demand for products and services in bull markets can cause prices to rise, and shrinking demand in bear markets can trigger deflation.

In contrast, bears hibernate, so bears represent a market that’s retreating. The investing strategy of dollar-cost averaging helps to smooth out the high and low prices of a stock. Because the businesses whose stocks are trading on the exchanges are participants in the greater economy, the stock market and the economy are strongly linked. Investors’ confidence starts climbing, and the overall demand for stocks and similar assets increases. Businesses and companies usually get higher equity valuations, which usually means high initial public offerings (IPOs). The National Bureau of Economics (NBER) will officially announce a recession when gross domestic product (GDP) — which correlates with a bear market — declines for at least two consecutive quarters.

More specifically, however, a bear market describes any stock index or individual stock that drops 20% or more from its recent highs. A bull market, on the other hand, typically rises 20% from recent bear market lows and oanda- a foreign exchange brokerage review reaches record benchmark highs. In the investing world, the terms “bull” and “bear” are frequently used to refer to market conditions.

The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. By employing a dollar-cost averaging strategy of investing a fixed dollar amount over regular periods, investors can lower their average buy-in cost. Market timing is notoriously difficult, and you never know when the market is going to hit its bottom. Using the term bull market is informal—there’s no formal metric to measure or determine when a bull market is happening. Still, a 20% increase in prices is often used as the ballpark figure that indicates a bull market.