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Bull vs Bear Equity Market

Everything you need to know about bull vs bear equity markets and how it can impact your investment strategy.

Updated

7 min. read

Are you running with the bulls? Or maybe you're hibernating with the bears? Investing can feel highly complex, but you don’t need to have a degree in animal behaviour to understand the stock market. Bull market and bear market are common financial terms used to describe a specific economic timeframe, but what exactly do they mean.

A bull market is when stock prices are trending upwards, while a bear market is the exact opposite, it occurs when stock prices are trending downwards. You might be wondering what relationship those animals have to the stock market. None really, but the terms bull and bear market comes from a historical perspective and a bit of insight on animal behaviour, a bull attacks with its horns upward, while a bear will attack by swiping its claws downward, the predatory style of each animal symbolizes two distinct ways in which the financial market moves. Both severe market events can lead investors to wonder what’s the best way to navigate a bull or bear market.

What is a bull market?

A bull market occurs when an economy is on a sustained rise, as demand for securities is strong, but supply is weak and as a result share prices increase. During this economic phase, consumer confidence is high, a thriving economy and low unemployment are typically key factors that work to incite investors to buy securities. The most recent bull market occurred from 2009 to 2020 and was the longest bull run in the history of Wall Street.

How to maximize returns in a bull market

A bull market provides investors with an opportune time to invest. With rising share prices, investors can ride the momentum and seek a plethora of opportunities in the stock market to maximize their return on investment. Bull markets provide investors with the ideal market conditions to invest in growth stocks or utilize risk in search of greater rewards. However, it’s still important for investors to take a long-term view and not entirely get caught up in rising prices. A bull run won’t last forever, so it’s key to lean on sound valuations and a strong underlying business model in the stocks that investors select.

What is a bear market?

A bear market is when the economy sees a prolonged downturn and stock prices decline to reflect the lack of future growth and negative cash flow in the market. There are many causes for a bear market, like a weak or slowing economy, war, or geopolitical tension, but all events have one common thread they result in a decrease in economic confidence. The length of a bear market is extremely unpredictable, as it can last from a few weeks to several years.

“It’s important to know that predicting the transition between a bull and bear market is a difficult and risky task”

How to weather bear markets?

A diversified portfolio is an easy way to combat against a bear market. Investors may feel an urge to sell stocks as they prices fall, however, this can also be an opportunity to invest in defensive stocks, such as health care, consumer staples and utilities. Defensive stocks are strong companies that provide investors with stable earnings and consistent growth which are essential during a bear market. It’s important not to panic and sell based on fear during a bear market. While stocks are losing value in the short-term, it doesn’t mean your slumping portfolio is valueless. Investors can also transition their focus on the long-term and understand that while they may be experiencing a bear market it’s simply a trend and won’t last forever.

Key differences between a bull and bear market

For investors, the characteristics of a bull and bear market can be summarized by two simple words, boom and bust. Each economic event has distinct attributes that can be felt in our daily lives. During a bull market, you may feel more optimistic, with stable employment, increased financial prosperity, and the comfort of knowing your investments are benefitting from an economic boom period. The opposite can be said if you’re experiencing the uncertainty of a bear market, because as the market retracts, unemployment will rise as companies decide to freeze hiring or layoff employees to cut costs.

Let’s compare the differences between a bull and bear market:

Supply and Demand

During a bull market investors can expect to see higher demand and because of lower supply, the market will see an increase in value for securities. Investors can expect the opposite during a bear market as less demand and higher supply will result in a decrease in value for securities.

Stock market performance

Generally, investors can expect to see the stock market rise by 20% over at least a two-month period during a bull market. This is an advantageous period for investors as they can seek to maximize their investment returns. In a bear market, generally investors can expect to see the stock market decrease by 20% over at least a two-month period. Defensive stocks are often sought to help minimize losses during a bear market to help withstand tough market conditions.

Change in unemployment rate

A bull market is a sign of a rising economy, as companies see an increase in revenue, they will look to hire more employees to further growth. This can be a great time for employees to seek new career opportunities or transition into another job sector. During a bear market, revenue falls as the economy slows, which results in companies looking for a strategy to cut costs. The unemployment rate tends to rise in a bear market because companies will freeze hiring or layoff employees to help curb financial losses.

Change in GDP

During a bull market, GDP will rise as companies generate more revenue due to an increase in consumer spending which leads to economic growth. The opposite is true for a bear market, as GDP will fall due to the economic slowdown and consumers will be less able to spend.

How you should invest during a bull or bear market?

The right investment strategy is key to having success during any market conditions, but investors need to understand it can be impacted by the differences between a bull and bear market. A bull market provides you with the opportunity to have higher returns, so investors often look to buy stocks early in the trend to take advantage of rising prices and maximize returns. During a bear market, investors often look to further diversify their portfolio with defensive stocks and fixed income to help minimize the increased potential for loss.

Overall, it’s important to know that attempting to time the market or predicting the transition between a bull and bear market is a difficult and risky task. The best investment strategy is rational and goal-oriented, because in a constantly shifting market the most profitable outcomes are revealed through long-term investing.

Key takeaways

Let’s review the key attributes of both bull and bear markets. A bull market occurs when securities rise, due to an increased demand and less supply, while a bear market occurs when securities fall, due to a decreased demand and more supply. Patience and rational actions are the best way for investors to navigate bull and bear markets. Working with a financial advisor to create a detailed plan can provide the right strategy to succeed regardless of market conditions. This means having a well-diversified portfolio and being focused on a long-term investing to achieve your financial goals.