When investing in any financial market, you will often find commentators talking about either a ‘bull’ or a ‘bear’ market. Although both these terms make one think of aggressive, powerful animals, they refer to very different market environments with their own unique conditions. It is therefore very important to know the difference between the two before making any investment decisions.
In this week’s blog, we will explain what each of these terms mean, and the advantages and disadvantages of trading in these markets. Hopefully with this knowledge in hand, you will be able to plan your trading strategy and be well-prepared for either of these markets.
What is a bull market?
A bull market is one where prices are rising, or expected to rise. According to The Motley Fool, a bull market takes effect when stock prices have increased by at least 20 percent since the last market downturn. In a bull market, investors are generally optimistic about future market performance and the strength of the economy. This confidence can create a positive feedback cycle which can in turn result in massive market growth, with Forbes reporting that stock prices increase by an impressive 112 percent during bull markets.
Bull markets are more frequent than bear markets, having occurred for 78% of the last 91 years. The longest bull market in history was between 2009 to 2020, only ending due to the economic disruption caused by the COVID-19 pandemic, but according to Forbes they generally last around 2.7 years on average.
Pros and cons of a bull market
One of the main advantages of a bull market is that there is increased supply and demand, meaning that you are more likely to get a return on your investments and end up with a profit. In addition, given that a bull market is an indicator or projection of positive economic growth, you can benefit from a relatively safer market and attempt riskier (and potentially more profitable) trades, if you feel confident doing so.
However, any risky trades should be carefully considered. A disadvantage of bull markets is that they can encourage investors to be greedy, which can ultimately lead to their downfall as the market can become overleveraged. Furthermore, investors can become more susceptible to investment scams as the desire to make a quick profit can lead traders astray from a careful, well thought-out plan. Having a good understanding of your psychology is important in any market conditions, but especially during a bull market where the thrill of a potential win can be overwhelming.
What is a bear market?
Bear markets are the opposite of bull markets, meaning that they are markets that are generally in decline and have falling prices. More supply than demand, negative market conditions caused by rising unemployment and general economic downturn can result in a bear market, which is when stock prices fall by 20 percent or more for an extended period of time. Negative feedback can contribute to bear markets in the same way that positive feedback does to bull markets; if many investors sell their investments or move to more conservaive securities to protect their money, stock prices can fall even lower, which results in more selling, and so on.
Bear markets generally don’t last as long as bull markets, but can still have devastating long-term economic consequences. The most famous example is The Great Depression, which began after the Wall Street Crash of 1929 and didn’t end until World War Two brought about some element of economic recovery from 1942. However, more recent bear markets have normally recovered in the space of a few months.
Pros and cons of a bear market
Bear markets are associated with pessimism, and for good reason. As a general indicator of the future movements of an economy, a prolonged bear market can be a sign of oncoming economic recession, which can have damaging effects such as widespread job losses and reduced gross domestic product (GDP). Furthermore, making a profit off a bearish market can have a huge influence on your mindset, making you less likely to invest in a more frequent and active bull market, which in turn can reduce your chances of regularly successful trades.
However, there are some advantages to a bear market, and in some cases they can actually be more beneficial to traders. During a bear market you may be able to purchase some in-demand stocks like Alphabet and Tesla at a discounted rate, or make the most of currency fluctuations in the Forex market. As the saying goes, buy low, sell high – and save your buying for a bear market.
The markets can change at any time. A bull market can quickly turn into a bear market, and vice versa. Although we generally spend more time in bull than bear markets, past performance is no guarantee of future results, and even the smartest predictions can be wrong.
Having a long-term plan and a diverse portfolio of investments will improve your ability to weather any changes in market conditions. Bull markets can be exciting and bear markets can be scary, but both of them are natural economic events and with strong planning and preparation, you should be able to see them through and come out on top.