TL;DR
- A bull market is associated with a booming economy, which often leads to low unemployment rates, an increase in disposable income, and higher market value.
- A bear market is associated with a receding economy, which often leads to high unemployment rates, a decrease in disposable income, and lower market value.
- Understanding the trends of bull versus bear markets will help inform an investor on when it may be best to buy or sell a stock.
- An investor who is looking to build a long-term portfolio may be less concerned with investing in a bull versus a bear market, due to the cyclical nature of the stock market over time.
What is a bull market?
A bull market is a market that is rising and usually reflects a flourishing economy. During a bull market, business growth and an overall optimistic economy lead to stock prices that steadily increase. The most recent example of a bull market is the market immediately following the Great Recession of 2008. Starting in 2009, the United States saw a period of consistent growth for over a decade and it is now characterized as the longest bull market in history.
What is a bear market?
A bear market is a market that is declining and usually reflects an economy that is experiencing a recession. During a bear market, a pessimistic economy and lack of business will drive stock prices and overall market value down. Over the years, bear markets have led to some of the most notorious stock market crashes, such as the Stock Market Crash of 1929, which was the onset of the Great Depression.
Bulls vs bears
There are a few major conditions that characterize a bull versus a bear market, but most of these conditions are driven by changes in economic activity. A bull market is associated with a booming economy, which often leads to low unemployment rates, an increase in disposable income, higher demand for stocks, and, therefore, higher stock prices. A bear market is associated with a receding economy, which often leads to high unemployment rates, a decrease in disposable income, lower demand for stocks, and, therefore, lower stock prices.
Disposable income is the amount of money that remains after mandatory payments, like taxes, are taken care of. People with more disposable income are more likely to go out and spend money, which in turn helps businesses grow. Disposable income is often linked to employment rates; if people are employed and being paid regularly, disposable income will increase. Disposable income tends to influence how investors feel toward the overall stock market and economy. If a person feels financially secure and has a steady income, she is more likely to invest some of her money in the stock market. This sentiment increases participation in the stock market and therefore increases the demand for stocks. A higher demand tends to drive stock prices and overall market value up. In a bear market, investors have less disposable income and less confidence in the market, so there is often a move toward selling investments. The more money that moves out of the market, the less demand for stocks and the further the market dips in value.
Why it matters to investors
Timing is everything in the world of investing. If an investor enters the market at the lowest value point and sells at the highest value point, she will maximize the return on her investment. Therefore, understanding the trends of bull versus bear markets will help inform when it may be best for an investor to buy or sell a stock. Some people recommend investing when trends of a bull market first appear, due to the future growth potential associated with a thriving economy. Timing becomes more important if an investor is looking for a short-term return and less important if an investor is looking to build a long-term portfolio. Over the long run, your investments likely increase in value, regardless of the bear and bull markets it experiences. The market is extremely cyclical and will inevitably experience both bull and bear markets over a long period. Therefore, investing at any time, with a long-term outlook, is generally favorable.
Bottom line
Bull and bear markets represent the peaks and valleys of the stock market and overall economy throughout history. Economic conditions, disposable income, employment rate, and investor sentiment all change as the market shifts from bull to bear and vice versa. Throughout history, bear markets preceded the worst depressions but were often followed by bull markets and stretches of economic growth. It is important to understand the market trends associated with bull and bear markets as it will affect the value of your investment portfolio over time. That being said, the market is very cyclical in nature, so an investor who is looking to build a long-term portfolio may be less concerned with the fluctuations associated with bull and bear markets.
