Table of Contents:
- Defining Bullish and Bearish Market
- Bullish vs Bearish Market Characteristics
- Evaluating Bullish and Bearish Market Trends
- How to Take Advantage of a Bull Market and Bear Market
- The Bottom Line
Whether we like it or not, as investors, we need to pay attention to market conditions and understand how they affect our investments. If you havent yet become acquainted with the terms bull market and bear market, youll want to stick around.
Roughly speaking, a bull market is one in which stocks are mainly rising and a bear market is one in which stocks are mainly falling. The reason they are important is that the associated optimism/pessimism can affect the whole market, including your investments and have significant effects on your portfolios bottom line.
Defining Bullish and Bearish Market
A bull market refers to a situation when stock prices have risen by at least 20% from the last market drop and values are on the rise. That is, the overall outlook is positive with growth in business and the economy as a whole. As a result, a general feeling of opportunity is high among investors.
On the other hand, a bear market is when stock prices have fallen by 20% since the last market high, and attitudes of negativity and pessimism are the norm. So, investors can sometimes act impulsively, afraid to lose money, leading to bad investment decisions.
Since the conditions of the financial markets can be determined by investors attitudes and actions, the terms bearish vs. bullish often reflect current attitudes and drive investing trends.
Key Takeaways:
- Bull and bear markets have certain characteristics that investors should take into account.
- Learning market trends requires evaluating performance over a period of time.
- Market changes can be distressing but can serve as unique opportunities.
Bullish vs. Bearish Market Characteristics
As we discussed, bull markets are when the economy is strong, prices are on the rise, and both the tone and attitudes surrounding the market are positive. Conversely, in a bear market, the economy is weakened with prices falling and an overall attitude of negativity and pessimism.
Investor Attitudes
Whether we know it or not, the stock market and how its doing at any given time is a reflection of how investors feel about and react to changes that occur in the market and the economy. Investors sentiment is a powerful tool and is directly related to stock market performance.
When we experience a bull market, investors feel upbeat and invest with confidence. The overall tone is of growth and profit as prices rise. In a bear market, attitudes are negative, and investors act impulsively as they try to move money to protect what they have, leading to uncertainty and doubt and lower stock prices.
Economic changes
The stock market comprises a variety of different types of businesses that sell shares on the open market, so the stock market and our economic outlook are directly related to one another.
Since a bull market corresponds with a strong economy, unemployment rates are low, giving people more disposable income to spend, which, in turn, strengthens the economy even more, which shows in the value of stocks.
A bear market is linked to a weakened economy where unemployment rates sour and people are afraid to spend. This, in turn, leads to businesses losing profits that affect their stock prices by lowering their value.
Securities Supply and Demand
When we are in a bull market, and our economy is strong, theres a strong demand for investment securities. Still, supplies are weak since many investors are buying and not selling. Because of this, share prices continue to rise as investors jockey for positions to buy.
When were in a bear market, with a weak economy, demand is low as investors sell and supply is high, which leads to dropping stock prices.
Evaluating Bullish and Bearish Market Trends
When looking at market trends, its essential to evaluate performance over a period of time, not just reactions to events that may or may not be related to a changing market. When small changes occur, that can mean either a short-term event or a stock market correction which is a decline of 10% or more from the previous peak.
Corrections are a normal part of the cycle and can last days, weeks, or months. Determining if there will be a bull or bear market takes time to evaluate, and the ups and downs can cancel out, leading to a flat market trend. Some investors try timing the market for better results but having a solid investment strategy with long-term goals can be more beneficial in the long run.
How to Take Advantage of a Bull Market and Bear Market
Market changes, such as in bull and bear markets, can be distressing but can serve as unique opportunities if you have a plan. At times, the market can be volatile, which can play on emotions. But when you have a strategy in place, you can generate profits and expand your portfolio at the same time.
Of course, it comes down to consistency, the ability to stay focused, and strategic thinking so you can see the opportunities and how you can benefit, even while others are reacting. Making smart choices with a long-term view when times seem bad can have an overall positive effect on your portfolio in the long run.
It is tempting to try and buy early and sell when investments have reached their peak but it’s not always that simple to do. Ultimately, successful investment requires economic insight. Though it is still important to keep an eye on the broader goings on of the market.
In a bear market, with dropping prices, investors sometimes react defensively in an attempt to minimize losses. One common strategy is selling at a loss and putting your money in fixed-income securities. However, when planning, it can be beneficial to include securities that have the potential to grow during a bear market.
They are called defensive stocks and include stocks and bonds spread across various industries, sectors, and countries, such as utility companies that tend to stay stable and dont depend on current economic conditions. Investors can also benefit in a bear market from buying put options and exchange-traded funds (ETFs).
The Bottom Line
As an investor, you will experience both bull and bear markets that impact your investments. Therefore, its essential to keep in mind your risk tolerance, having a diversified portfolio, and strategic thinking can minimize losses as the market changes.
The one thing history has taught us about the stock market is that it will bounce back though individual stocks may not. Of course, the cycles can wreak havoc on our emotions if we become too emotional about our investments.