When a financial market is appreciating generally, it is termed a bull market. Contrarily, when it is depreciating, it is termed a bear market.
Both these terms are commonly used in the stock markets. These market conditions come with contrasting features and causes. Therefore, investors deploy different investing strategies during these contrasting times.
Let us discuss what is a bull and bear market and what are the key differences.
What is a Bull Market?
A bull market is a financial market condition where asset prices keep increasing over a prolonged period.
The economic indicators are generally positive and investors remain optimistic about the stock market conditions generally. There are no set rules to define a bullish run.
Commonly when stock market indices and stocks appreciate above 20%, we call it a bull market. It may last from a few months to several years.
Most stocks and indices will appreciate consistently during a bull market run. Although the market will keep seeing lows as usual but for shorter periods during a bull run.
A bullish run is commonly linked to stock markets. However, it can be associated with other financial markets as well. The most recent bull run continued from 2009 to early 2020 before the Covid-19 catastrophe reversed the trend.
What is Bear Market?
A bear market is a financial market condition where asset prices fall consistently over an extended period. Individual stocks and market indices lose value consistently during a bearish run.
Typically, when stocks and indices fall by 20% or more, we consider it a bearish market trend. Like the bull run, there are no hard and fast rules to define a bearish trend as well.
The macroeconomic indicators remain negative and investor sentiments remain pessimistic about the stock market performance generally. Companies lose more value during this sluggish run than they make.
The recent most bear market trend was observed during the global financial crisis from 2007 to 2009. It started after the housing market bubble busted that continued for the prior five years.
What are the Characteristics of a Bull and a Bear Market?
The characteristics and causes of a bull and bear market are contrasting in nature and effects. Both types of market trends may follow each other but that’s not necessarily a rule.
Bull Market Characteristics
The overall economic activities remain positive during a bull market. Economic indicators like the GDP show positive signs over an extended period.
It results in more productive activities for companies in that economy due to an increased demand for their products or services. Certain fiscal policies or regulatory changes can start a positive economic trend as well.
During a bull market, the unemployment rates decrease and consumer spending increases. It further escalates the demand for products/services in an economy.
In turn, companies generate higher revenue and profits. An efficient market is good enough to capture these indicators and even predict them.
Collectively, the stock markets start appreciating and investors put more money in the market. The established trend of this increased and positive market activity results in a bull market condition.
Bear Market Characteristics
Contrary to the bull market, economic activities shrink and prices fall in a bear market. Several domestic and international economic, political, and technological factors can impact the markets.
A slowing economy is the most prominent feature of a bear market. Companies start declining their operational level activities and their revenues start falling.
Unemployment levels increase as a result of lower industrial activities. It results in further decreasing consumer demand.
Soon the stock market starts declining and the investors pull out their investments. An efficient market will soon pick up the trend and it will become an established bearish market.
A bear market may start due to uncontrollable factors like a war, pandemic, bull market bubble bust, and technological shift as well. Economic recessions and geopolitical scenarios are other common reasons for a bearish market.
How to Invest in a Bull and Bear Market?
Investors want to profit from either market direction anyways. However, profiting from a bull and bear market will require significantly different investment approaches.
Investing During a Bull Market
The most important thing to do in a bull market is to identify early trends. If you can buy early, you can hold and sell later to make significant profits.
However, it is still a risky strategy as no one can exactly predict an early trend. Therefore, the “buy and hold” trading strategy is a good choice during a bullish run.
Similarly, utilizing swing trading and retracement strategies can aggressively bring profits. Both these strategies are riskier than the conventional “buy and hold” strategy though.
Investing During a Bearish Market
Traders can benefit from falling prices through short-selling. However, identifying potential stocks to short-sell and time the exit strategies is difficult as the market as a whole look to do the same thing.
Therefore, optimizing your trade strategies with dollar-costing methods and investing in defensive stocks is an ideal method.
Diversification and utilizing market research tools are vital for success in both types of market conditions anyway.
Bull Market Vs Bear Market – Key Differences
Let us now summarize some key differences between a bull and bear market from an investor’s perspective and the market outlook.
Economic Activities
A bull market is an aftermath of positive and increased economic activities. It is a general indicator of a bullish trend that economic indicators start showing positive signs steadily.
It means individual stocks and indices show price appreciation due to improved economic conditions.
On the other hand, a bearish market is a result of a sluggish economy. In a slowing economy, companies start posting quarterly and yearly losses.
Individual stocks and indices keep losing value and the market establishes a falling trend that soon is labeled bearish.
Inflation and Interest Rates
The inflation rate remains lower in a bull market. Due to improved economic activities, there are more jobs, and unemployment rates decrease. The interest rates are also lower generally.
However, due to the increased purchasing power of consumers, the demand may outweigh the supply line sooner. It means there is always a chance of a higher inflation rate in a bullish run as well.
Conversely, the inflation rates are higher in a bearish market. Central banks increase interest rates to curb inflation rates. The unemployment rates remain higher during a sluggish economy and a bearish market run.
Investor Sentiments
Investors remain optimistic and pour more money into the market during a bull market. Due to increased economic activities, the companies show higher revenues as well.
That in turn creates more jobs and consumer spending increases. Investors tend to borrow more money for spending and investing activities during such times.
Conversely, investors remain pessimistic during the bearish market condition. They pull out their investments and only invest in defensive stocks or bonds.
Similarly, consumer spending decreases and they tend to save more fearing joblessness and higher inflation rates in the future.
The Demand-Supply Line
The demand line for stocks and trading remains bullish. It means there is an influx of money into the stock market.
Financial assets like stocks and securities are short in supply due to increased demand from investors. Therefore, it further results in higher asset prices that keep the positive trend going for extended periods.
Contrarily, the demand for financial assets remains lower in a bearish run. As investors look to sell, the supply in the financial markets is excessive and the demand is lower.
The economic conditions follow the same routes as the financial markets during their respective stock market trends as well.
Trend Duration
There are no set rules to define market trends as bullish or bearish. Then, there are no rules to define the length of these trends either.
A bull or a bear market trend can last from a few months to several years. The latest bull market run was the longest one which lasted for almost 11 years.
Similarly, the latest bearish market trend from 2007 to 2009 lasted for almost three years.
Investment Strategies
Investors pursue aggressive trading strategies like day trading, swing trading, trend trading, etc. During a bull market.
As investor remains optimistic about the market generally, they tend to pursue riskier trading strategies.
Contrarily, investors remain pessimistic and pursue defensive trading strategies during a bearish market. They tend to play safe and focus on minimizing losses through short-selling, hedging, and defensive stocks rather than making profits.
However, the choice to pursue a trading strategy also depends on the trader’s investing style and risk appetite and not just the market conditions.
