Bull and bear markets are completely different beasts—and as an investor, it’s important to know the difference between the two.
A bull market is loosely defined as a persistently sloping upward line. During a bull market, market confidence is high and investors are eager to buy stocks with the hopes that their stocks will grow in value. But during a bear market, it’s quite the opposite. Investors want to sell their stocks because of fear and anxiety that the market will crash.
In 2021, the U.S. stock market kept hitting new record highs. The S&P 500 has had more than 50 new highs in 2021 alone, and the Dow Jones Industrial Average has had numerous itself. This signifies we’re in a bull market as the stock market today is one of the strongest ones of all time, explains Liz Young, a CFA and head of investment strategy at SoFi.
“People are feeling very optimistic,” adds Delyanne Barros, a money expert and founder of Delyanne the Money Coach. “People are just throwing money in the stock market because they believe that prices are going to continue to go up.”
But to temper your expectations and grow your money in the long run, it’s important to know exactly what bear and bull markets signify, and how that might play into your investment strategy.
Read on to learn more about what it means exactly to be in a bull market or bear market, what forces might cause us to be in either, and how to go about investing regardless of which type of market we’re in.
What Is a Bull Market?
A bull market is a rise in stock prices and in a broad market index — think S&P 500 or the Dow Jones Industrial Average — over a period of time. A good way to remember this is to think of a bull’s horns as indicative of stock market prices on the rise.
While it can be defined as an increase of at least 20% over a two-month period, it largely can be anything that’s positive movement in the stock market, explains Young.
During a bull market, you’ll most likely get slight dips, but those look like blips on the radar, and the line is generally trending upward, says Young. “When you’re looking at a longer-term chart of an index, it’s sloping upward until there’s a bear market,” she says. During a bull market, optimism and confidence are high, and there’s a great demand to buy stocks. A bull market also ends once we enter a bear market.
What Causes a Bull Market?
A bull market can be caused by a number of things. Let’s look at some of the more common ones:
Fiscal and monetary stimulus
We’ve witnessed this and have been impacted by the stimulus and rescue packages issued by the government in the middle of the COVID-19 pandemic. This usually happens in the midst of a bear market because something’s wrong, says Young. “There was some sort of shock to the system, or some sort of crisis at play.” Besides the pandemic, this happened during the mortgage crisis.
Growth in corporate earnings
When publicly traded companies report how they’re doing each quarter, they tell us their bottom line, their net income, and their sales growth, says Young. They also report their revenue, what happened last quarter, what they expect to happen in the coming quarters. “If those numbers are positive and they’re within or above expectations, you can see, at least in the stock market, a company gets rewarded for those results,” says Young.
What Is a Bear Market?
Unlike a bull market, where there’s no straightforward definition, a bear market has a very specific definition: when the market is down 20% for at least a two-month period. “If somebody were to say that we were in a bear market in the S&P 500, that means that we were down 20% from peak to trough,” says Young. “Once it crosses 20%, you stay 20% or you go further down. You’re just in a bear market. And when people talk about a bear market territory, that’s 20% or more. Nineteen and a half percent doesn’t qualify.”
During a bear market, the economy may be shrinking, says Barros. “People are getting laid off and losing jobs and are not spending as much money. People are hoarding money. People are very fearful, they’re anxious and they’re more risk-averse. And so a lot of that feeds into the bear market.”
What Causes a Bear Market?
Here are a few common things that can cause a downtown in the stock market:
Events out of our control
These can be a natural disaster, a pandemic, or war. “These are natural acts or things that are completely outside the control of the stock market or the economy,” says Young. “They would certainly cause likely some sort of market reaction, probably a bear market.”
Excessive risk taking
A bear market can also be caused by events tied directly to the stock market. When there’s excessive risk taking at play, you can have a sort of risk bubble that bursts, says Young. That’s exactly what happened during the subprime mortgage crisis. “We had a sector of the market where most of the risk taking occurred,” says Young. “But what happened was it was so pervasive through the economic system that it took the whole thing down.”
Bull Market vs. Bear Market
During a bull market, you might have many corrections along the way. A correction is a 10%-20% drop in value from a peak. Once you’ve entered a bear market, it’s typically accompanied by a recession, or some sort of change in the business cycle, explains Young. “Then that’s the end of that bull. And then after the bear market, when the market recovers and starts to go up again, that’s the beginning of a new bull.”
Barros offers the following example of a bull market versus a bear market: When we saw the 2008 crash, that was something that was caused by the housing crisis. And it sent us into a bear market that lasted almost two years. And right after the bear market, we had a bull market that lasted up from 2009 to 2020, when the pandemic hit.
How Should Beginners Invest?
Here’s the thing: if you’re just starting out, it’s probably best not to make your investment moves based on what part of the cycle we’re in. The best time to start investing is right now.
Diversify your investments
Whether it’s a bear market or a bull market, the key is to keep your investments diversified. By doing so, you weather any downturns and grow your money in the long-term. This means spreading out your investments into hundreds of different companies, instead of just a select few.
“If you’re diversified enough, like in an index fund in an ETF, or if you have a significant portfolio of individual stocks where you’re across different industries, you were able to make a nice recovery as the market recovered as well,” says Barros.
Whether it’s a bull or bear market, diversification and buying and holding are the key to long-term growth.
A simple way to do this is to invest in index funds and ETFs, explains Barros. “When you own the entire market, you don’t have to guess which sector is going to get hit hard. And nobody could predict, or stop it from coming.”
Be mindful that bear markets are inevitable
As the saying goes, what comes up, must come down. If you started investing during the pandemic, you’ve only experienced a strong bull market. Always ride the ups and downs and don’t get fearful if the market decides to take a downturn.
Don’t chase after performance
When you’re going after stocks that are performing well, and constantly shift your strategy or buy and sell frequently, that could actually hurt your odds of losing in the stock market. “You’re chasing a moving target, and you’re increasing your chances of being wrong,” says Young.
Barros references a famous quote by Jack Bogle, the founder of The Vanguard Group: Instead of trying to find the needle, buy the whole haystack. “So you buy the whole stack, the needle is going to be in there,” says Barros. “So then you don’t have to spend your time, energy and your sanity trying to find the needle, which a lot of us don’t have the time or skills to do.” Again, diversifying your investments in index funds or ETFs is a great way to get the whole haystack. Read NextAdvisor’s step by step guide to help you start investing today.
Set it and forget it
If you’re a beginning investor, it might be best to buy your index fund, then buy and hold, explains Barros. “This has proven over time that it works, that it leads to a successful investment portfolio,” says Barros. “The key here is time and patience. And a lot of people are getting sucked into this idea of like, well, I don’t want to wait 20 years. I want the money now. We all want the money now, right?” Slow and steady wins the stock market race.
Be mindful of your emotions
The most prevailing emotions when we invest are fear and greed. We might get fearful when the stock market tumbles and we’re tempted to sell our stocks. However, it’s important to wait it out.
If you’re a young investor, remember: Time is on your side. “So if you’ve set up a diversified portfolio that’s reasonably aggressive if you’re younger because you’ve got so much time, but it should still be diversified across sectors, regions, size, categories, asset classes,” says Young.
“Whether it’s a bull or bear market, you should not change your investment strategy,” says Barros. “Especially if you’re a long-term investor with decades ahead of you. Don’t stop investing. Keep buying, and you’re going to ride it out and recover over time.”