What Is a Bear Market vs. a Bull Market?
January 11, 2023
The stock market is an exciting place, to say the least. It’s where fortunes are made (and lost), and where absurd amounts of money trade hands every day.
In 2021 alone, more than $160 trillion worth of stocks were traded on global equity markets. That’s around $635 billion dollars traded each and every day.
All this buying and selling activity is what influences the prices of stocks. When demand is high, it pushes up the price of stocks. When demand is low, it drives prices down.
Investor demand is influenced by dozens of factors, including the financial performance of each individual company. But overall market trends also come into play. If the stock market is doing well, traders might refer to it as a “bull market”. If prices are declining, it may be called a “bear market”.
But what do these terms really mean? What is the difference between a bear market vs. a bull market and how can investors navigate each type of market cycle?
Stock Market Indexes: How Bear Markets and Bull Markets Are Measured
The terms bear market and bull market refer to the stock market as a whole, rather than individual stocks. Traders generally look to stock market indexes to gauge the performance of the market. Indexes track the performance of many different companies.
For instance, the S&P 500 index tracks the 500 most valuable publicly traded companies in America. It’s widely seen as an accurate gauge of the stock market as a whole, because it represents most of the biggest companies in the US — including household names like Coca-Cola, Microsoft, and Amazon.
Investors look at the performance of broad indexes, like the S&P 500, when determining market sentiment. If Microsoft stock declines significantly, that doesn’t necessarily mean that a bear market has begun. But if the S&P 500 declines significantly, that signals a broader shift in the equity markets, which may signal a bear market.
What Is a Bear Market?
A bear market is when prices of stocks are declining significantly over a period of time. In most cases, bear markets are defined as a 20% drop from recent highs.
For example, let’s say the S&P 500 has hit a recent high of 4,000. The value of the index is calculated based on a weighted average stock price performance of the companies it includes. After reaching a high of 4,000, a bear market would begin once the index hits 3,200 (a 20% decline).
Remember, the S&P 500 represents 500 of the largest companies in America, so if the index declines 20%, that means that the largest companies trading on the stock market are declining in value.
Bear markets are often characterized by pessimistic investor sentiment. As prices decline, traders begin to expect further declines — which continues the cycle.
A bear market can in some cases lead to a full-blown stock market crash like we saw in 2008, or it can reverse through a change in investor sentiment or economic conditions.
Investing During a Bear Market
During a bear market, prices of stocks are generally trending downward. This can make short-term investing and day trading risky.
At the same time, a bear market can present opportunities for long-term investors. By the time a bear market has officially begun, stock prices will have declined by at least 20% from recent highs. For long-term investors, buying during a bear market can be like buying stocks at a steep discount.
For example, a 20% decline in stock prices essentially means a 20% discount for the investor. You can now buy the same number of shares, and pay 20% less. If you have a long-term outlook on investing, bear markets can present good buying opportunities.
What Is a Bull Market?
A bull market is when prices of stocks have risen and are expected to keep rising. In most cases, a bull market is considered when stock prices have risen by 20% or more from recent lows.
For example, if the S&P 500 has been in a bear market and has declined to 3,000, a bull market would begin when the index has increased to at least 3,600. Remember, a bull market is triggered when stock values rise 20% from recent lows.
Bull markets are generally characterized by confident investor sentiment. As prices increase, traders expect them to continue increasing, which encourages buying and perpetuates the bull market cycle. Bull markets can be short-lived, or extend for years.
Investing During a Bull Market
During a bull market, prices have been increasing and are expected to keep increasing. This can make investing seem very attractive and can present a good opportunity for both short-term and long-term investing.
At the same time, asset prices are high during a bull market. For long-term investors, this may mean that buying opportunities are more limited.
Bull Market vs. Bear Market: What It Means For You
Bull markets and bear markets are measures of how investors are feeling about the market. These cycles often align with economic conditions, as well — but not necessarily.
In other words, a bear market might signal that an economic recession is coming (or has already started). Or, it might just signal that assets have become overpriced, and the market is correcting itself. A stock market “correction” is usually considered to be a decline of at least 10% from recent highs, and is generally considered to be an expected phase of a healthy stock market growth cycle.
Likewise, a bull market may signal that the economy is going very well and will continue to do well. Or, it might just mean that investors are overconfident.
It’s always difficult to predict where the market is heading. Even the most successful investors have trouble accurately predicting the stock market’s movements. For most people, the key to investing success is to make a plan and stick with it for the long term.
How to Invest for the Long Term
Investing can be as complicated — or as simple — as you make it. While it’s often tempting to try to buy and sell strategically, pick winning stocks, or predict the future, these strategies are extremely difficult to predict.
For investing success, it’s wise to think about the long term. If you’re investing for your retirement, you don’t need to worry too much about the day-to-day movements of the stock market. Instead, you can just make a plan, and stay the course.
Warren Buffett, one of the most successful investors of all time, has simple advice for investors: Buy a low-cost index fund, like the S&P 500, and just keep buying.
Whatever Your Approach, Keep it Simple
Bear markets occur when asset prices have declined 20% from recent highs. Bull markets are when prices have increased by 20% or more from recent lows. Both are a measure of investor sentiment and the overall direction that the stock market may be heading in. For most investors, adopting a simple approach is ideal.
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