An investor needs to understand the stock market. For example, do you know what the analysts on CNBC mean when they talk about bear and bull markets?
A bull market broadly means that investors are confident in the market and are willing to buy stocks because they trust the stocks will grow in value. You can recognize a bull market by its consistently sloping upward line.
By contrast, a bear market means investors want to sell off stocks because the stocks are losing value, and the market could crash. Of course, you can recognize it by the persistently sloping downward line.
In 2021, the US stock market continued to achieve new record highs, such that the S&P 500 posted far more than 50 new highs. The DJIA has its fair share of notable moments too. Such times represent a bull market. The optimism is contagious, and people are eager to put money into the market because they expect the market to keep going up.
Bull Market 101
Two key characteristics of a bull market are:
- a rise in stock prices; and
- a rise in a broad market index such as the Dow Jones index or S&P 500.
Imagine a bull’s horns indicating rising stock market prices as a visual reminder.
It can also be an increase of at least 20 per cent over two months or some sort of increase in the market.
You’ll have slight dips in a bull market, but they’re not too significant relative to the general trend. The upward slope continues until a bear market comes.
What can cause a bull market?
Factors that can cause a bull market include:
- Fiscal and monetary stimulus, such as in the pandemic or mortgage crisis
- Growth in corporate earnings
Bear Market 101
A bear market has a more concrete definition than a wide-ranging bull market. For example, if a market is down 20 per cent for no less than a two-month period, it’s a bear market.
Stock indices like the S&P 500 and DJIA can be in a bear market. It happens when the market dips 20 per cent or lower and stays there. A “bear market territory” means that anything less than 20 per cent does not qualify.
The economy could be shrinking in a bear market. Job cuts and less spending are characteristic of bear market situations, and people are less inclined to take financial risks.
What can cause a bear market?
A bear market will happen if:
- the unexpected happens, such as war or natural disasters
- investors get reckless in the stock market
How You Should Respond to Bull and Bear Markets
You don’t dress the same way in winter and summer. So it would help if you had different strategies to play the bull and bear markets and win. And winning begins with knowing the difference between the two.
During a bull market, there could be multiple corrections along the way. A correction is a 10-20 per cent drop in value from a peak.
As soon as you enter a bear market, there’s typically a recession or change in the business cycle. The bull dies there. Once the bear market ends, the market recovers and resumes its climb to begin a new bull.
One good example of a bull versus a bear market is the 2008 crash caused by the housing crisis. It caused a bear market that lasted nearly two years. However, as soon as that bear market was over, another bull market resumed from 2009 to 2020, when COVID changed everything.
How to Invest as a Beginner
It’s best not to consider whether it’s a bear or bull market if you’re trying your hand at investing. Start right now and do the following:
- Diversify your investments to ensure you can stomach any downturns. Index funds are a good way to go.
- Expect bear markets no matter how high prices go. The law of gravity works in finance too.
- Don’t just buy stocks based on performance. It is the premise behind diversifying your investments.
- Buying to hold is great investment advice for beginners.
- Disregard fear, especially if you’re still young. Don’t change your strategy because of one downturn.
Investing can help you get ahead financially, especially after stopping working actively. It’s important to understand the nuances of the markets, such as bull and bear markets, to make sound investment decisions that will help you reap healthy dividends for years to come.
Note: Please do not invest money or assets in the financial markets that you cannot afford to lose. This article should not be construed to be investment advice and is for information purposes only