When the economy is seeing major swings, you might hear a lot about investors feeling bullish or bearish, which generally describes how positive or negative investors are feeling about the stock market.
During economic upswings or downturns, investors will respond by holding on tight to their investments, or selling them as quickly as possible depending on which strategy they deem will yield them better returns. These phases are known as bear markets and bull markets.
What is a bear market?
The SEC defines a bear market as a time when stock prices are declining, at least 20% over a two-month period, and market sentiment is generally not very optimistic. Bear markets typically result from an economic downturn fueled by geopolitical risks or market bubbles bursting. During bear markets, many investors will try to cut their losses by selling their investments, which contributes to already plummeting prices.
Bear markets usually are fueled by uncertainty in economic or asset value growth causing investors to lack confidence in growth prospects for assets leading them to sell, says Veronica Willis, investment strategy analyst at Wells Fargo Investment Institute.
In the past 92 years, there have been 21 bear markets in the S&P 500 prior to the current one, according to Yardeni Research. The longest bear market was in 1930 and lasted for 783 days. The shortest bear market was just 32 days and occurred at the start of the Covid-19 pandemic in early 2020.
What is a bull market?
On the flipside, a bull market usually happens when the economy is on the up and up and a broad market index sees a 20% increase over at least a two-month period. During this phase, investors are feeling good about keeping their money in the market and, in hopes of cashing in on rising stock prices, many investors will hang onto their current investments and potentially put even more of their money into the market to try to capitalize off of these conditions.
The good news: bull markets usually last longer than bear markets, with the average bull market lasting for 3.8 years, according to Investech Research.
What are the key differences between the two?
Bear and bull markets can impact several economic indicators differently. From the cost of goods, to the unemployment rate, interest rates, and more. Knowing the major differences between these two market phases can help you make more informed decisions as an investor.
A few key differences include:
- Supply and demand: During bull markets, the demand for securities increases, which in turn drives up their prices. The opposite tends to happen during a bear market. Investors are looking to minimize their losses and sell quickly to recoup their funds, which increases the supply of available securities and lowers share prices.
- Investor sentiment: Investor sentiment describes investors overall attitudes toward the current stock market conditions, and it can tell you a lot about how the market is performing and which direction it may be headed in. While investors may be more willing to buy during a bullish market, a bearish market will likely lead them to sell and move their money into low-risk investments. During a bear market or economic recession, shifting to higher-quality large caps from small caps can help to reduce exposure to areas most at risk, says Willis.
- Changes in GDP: Bear markets usually signal a slowdown in the economy, which may make consumers less likely to spend and, in turn, lower GDP. In a bull market, companies tend to generate more revenue and as the economy grows, consumers are more likely to spend.
- Changes in the unemployment rate: When companies are growing and generating more revenue during a bull market, they may need to hire more employees and will likely have the capital to do so, which may help lower the unemployment rate. During bear markets, companies may freeze their hiring pipelines or even reduce the number of employees they have to cut costs.
How to invest during each market phase
When the market gets bumpy, you may feel inclined to act quickly to protect yourself and your finances. But hasty decisions could cost you in the long-term. While there is no tried-and-true advice that will protect you during every market phase, there are steps you can take to cover your bases and try to come out on top regardless of whether its a bear market or a bull market.
1. Dont try to time the market
The stock market is unpredictable, and trying to time it is risky business. You could miss out on some major returns by being too quick to sell, or holding off on investing altogether. Rather than timing the market, focus on time in the market, says Dan Tolomay, chief investment officer at Trust Company of the South. Investors often fear that the market will fall if they invest, but the opposite is also true, What if you dont invest and the market rises?
2. Rethink your strategy
Rather than dwelling on if you should be investing or not, think about how youre investing.
Regardless of cyclical swings, historical experience shows the best time to invest is consistently, says Michael Weisz, President and Founder of Yieldstreet, an alternative investment platform. Using a strategy like dollar-cost averaging and investing consistently could help reduce the impact of market volatility on your portfolio and take the emotion out of investing if market swings make it difficult for you to stay the course.
3. Diversify your portfolio
If the market is making you uneasy, consider diversifying the mix of assets you hold, rather than selling. Staying the course and spreading your risk across asset types could make sharp swings easier to handle. Decide on an asset mix thats right for your goals and risk tolerance (not based on what the market has done or what you think its going to do) and stick to it, says Tolomay.
