Jul 30, 2022

Bear Market vs. Bull Market

There aren't really bulls or bears on Wall Street, though it may resemble a rodeo in certain ways. These terms are actually trader jargon for defining the state of the stock market. Let's examine what this means for you and the stock market.

Bear Market vs. Bull Market

What Separates a Bull Market from a Bear Market?

The bull and the bear are the two indicators to watch out for in the stock market. A bear market happens when stock prices are down 20% or more, whereas a bull market happens when prices are sharply higher. The stock market's lifecycle includes both naturally, and being aware of both can help you make smarter financial choices.

Bear vs. Bull Market

What Is a Bull Market?

Bull markets show that the economy is doing well and that unemployment rates are generally low. This gives investors more confidence and gives people more money to invest. This can lead to a huge amount of growth: During bull markets, stock prices go up 112% on average.

In a bull market, equities often increase. Bull markets typically correlate with:

  • A growing, or “expanding,” economy
  • Falling or stable unemployment
  • Rising corporate profits
  • Stable or modestly rising inflation

You might also hear an advisor describe the market or a certain stock as being "bullish." Simply put, it indicates that somebody believes the market or that specific stock is going to rise.

How Long Does a Bull Market Last?

Bull markets can last anywhere from a few months to a few years, but they usually last longer than bear markets. They also happen more often: 78% of the time in the last 91 years has been a bull market. A bull market lasts on average for 973 days, or 2.7 years. From 2009 to 2020, which was the longest bull market, stocks went up by more than 400%

What Is a Bear Market?

Bear markets happen when stock prices on major market indexes, like the S&P 500 or the Dow Jones industrial average (DJIA), drop by at least 20% from their recent highs. In contrast, a market correction is a drop of at least 10% that usually lasts much less time. Most of the time, corrections don't turn into full bear markets. But when they do, the average drop from the market's most recent high to the beginning of a bear market is 32.5%.

Bear markets tend to correspond with:

  • A shrinking, or “contracting,” economy
  • Rising unemployment
  • Falling corporate profits
  • Deflation or unstable inflation

During this time, investors frequently have pessimistic views of the stock market, and any stock market movements may be followed by a recession. However, a recession isn't always guaranteed by a bad market. In recent history, a recession has followed a bear market about 70% of the time. Many investors might wish to sell their holdings during a bear market in order to protect their capital, gain cash, or switch to more reliable securities. This may result in a sell-off, which drives down stock prices further. Additionally, it can force investors to sell their holdings for less money than they paid for them, which might make it more difficult for them to meet their long-term financial objectives. Bear markets have occurred less frequently since World War II, yet they still occur once every 5.4 years on average. In your lifetime, you'll probably experience 14 bear markets.

How Long Does a Bear Market Last?

Historically, down markets have typically lasted less time than bull ones. On average, a bear market only lasts 289 days, or just under 10 months. While some only lasted a few months, some bear markets persisted for years. The longest bear market was the Great Depression, which lasted from March 1937 to April 1942. The duration was 61 months. But bear markets have tended to linger shorter in recent decades. For instance, a bear market in 1990 only persisted for three months.

Since World War II, it has taken the stock market, on average, around two years to rebound or reclaim its prior peak. But it isn't always the case. The most recent bear market ended in August 2020, when stock values were at all-time highs, and started in March 2020.

The latest bear market, the Great Recession, however, didn't conclude for about four years.

But it's vital to keep in mind that even during a bear market, the stock market can see significant gains. For instance, more than half of the S&P 500's finest days during the past 20 years were during downturn markets.

What Should You Do in a Bull or Bear Market?

During bull markets, most people don't experience a lot of stress, but during bear markets, they frequently experience fear and uncertainty. How you should respond to a bear market, though, will depend on how long you intend to hold onto your investments.

If Your Goal Is Decades Away...

Try to hold onto your stocks and continue investing no matter what the market does if you are in your 20s, 30s, or even 40s and doing so for a long-term goal, such as retirement. Your investment strategy and holdings were chosen with both bull and bear markets in mind if you have a diverse portfolio. In a bear market, you might be tempted to sell off your investments to stop more financial losses, but doing so locks in the losses you have already suffered. The difficult choice of when to return to the stock market must then be made.

The market is notoriously difficult to time, and you never know when it will bottom out. Your investment returns could be reduced by more than 30% compared to someone who stays invested the entire time if you move your money to cash for a month while you try to determine whether the market has reached its bottom.

You should consider bear markets as opportunities instead:

A bear market gives you the option to purchase equities when you are young before they increase in price again. Additionally, by using dollar-cost-averaging, which involves buying an asset gradually rather than all at once, you reduce the likelihood that you will end up paying a higher price per share than you otherwise would. In fact, you might find yourself paying less per share altogether. Although you should aim to avoid selling when the market is falling, a bear market may serve as a reminder to reconsider your investment strategy once the market starts to rise. Even while you are aware that the market will improve, you might discover that you are less risk-averse than you initially believed.

Read more: Where is the Best Place to Park Money in Uncertain Times?

If Your Goal is in Reach:

You have less time to recover from bear market drops if you're towards the end of your investment time frame, which implies you just have a few years left until you want to retire. Even if we are aware that the market typically recovers after a bear market, it might not take your investments two years on average to go back to where they were. Because of this, we always advise keeping an eye on your portfolio throughout your life in order to modify your asset allocation and rebalance as necessary.

To maintain a healthy mix of stocks, bonds, and cash that meets your financial objectives and risk tolerance level, this could entail purchasing or selling various securities.

You might want to speak to a financial professional to ensure you have the correct mix of investments and diversification if you are unsure how to rebalance your portfolio so that it fits your timeline and your willingness to accept financial risk.

Connecting with our expert team with any questions you may have. Click here.

If You’re Retired:

Many people switch from growth to preservation investing after they lose their primary source of income. Typically, this entails adding more cash, bonds, and fixed-income securities to your portfolio than you previously did. A new risk arises when actively withdrawing funds from a finite nest egg: that you may do so in bad economic times or periods of high inflation and end up running out of funds.

The good news is that you can avoid worrying by adhering to a rule known as the 4% Rule.

The 4% Rule states that you can comfortably withdraw 4% of your retirement funds in the first year of retirement. After then, you can withdraw the same amount annually, adjusted for inflation, without worrying about running out of money for at least 30 years and, in certain situations, for as long as 50. Notably, both bull and bear markets were proven to be accurate in the research that produced the 4% Rule. Even so, you can decide to withdraw only 3% of your portfolio if you're concerned about how the stock market will do when you retire. To determine the appropriate withdrawal rate for your assets and level of risk tolerance, we strongly advise speaking with a financial advisor or tax expert.

Wrapping Up

Wall Street slang for the stock market's performance includes "bull" and "bear." Stocks are said to be in a bull market when they are rising and in a bear market when they are dropping. When the markets will switch from bull to bear or vice versa it's difficult to forecast.

Bear markets can be scary, but they are a normal part of the economy and often lead to even better market returns. With a diversified portfolio built around your financial goals, you can be sure to stay the course and ride out any market!

Fun facts

  • The average bull market has lasted 6.6 years, with the market returning an average of 339%.
  • The average bear market has lasted 1.3 years, with average losses of 36%.
  • The terms “bull” and “bear” are used for the way the animals attack: bulls thrust their horns up, while bears swipe their paws down.

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