Bullish vs. Bearish Markets

Article Summary:

Bullish vs. bearish markets refer to whether the stock market performance is trending up or down. In a bullish market, stock prices generally increase overall for some time, while they trend down in a bearish market. If you are a bullish investor, you are betting on the market heading for an upswing. Bearish investors believe the market will soon head for a downturn.

Even if you don’t follow the stock market, you may have heard newscasters and financial analysts discuss the terms bullish and bearish. Here’s a primer on what they mean and why these terms matter to investors.

Bullish vs. bearish

Bullish and bearish (or bull and bear) markets define the movement of the stock market, be it up or down. An individual investor may also be a bull or bear depending on how they view the market and how it guides their personal investing practices.

Bullish market outlook

A bull market makes everybody happy (with the possible exception of bearish investors). It means overall stock market prices are moving steadily up and the economy is generally good. It refers to a sustained period where, mostly, the market prices rise according to market indexes such as the S&P 500 and the Dow Jones Industrial Average.

Bull markets can also describe what’s happening in specific industries, asset classes, or individual stocks. It’s important to note that just because a market is considered bull, that doesn’t mean all stock prices continuously move up (there will still be losses). It simply means that, on average, prices are trending up.

Example:

Standard market indexes show, and financial analysts will tell you, that the longest bull market in recent history lasted from 2009 to March of 2020 when the pandemic hit. This was preceded by the subprime mortgage crisis beginning in 2007 followed by the Great Recession of 2008.

March 2020 showed a 34% dip in prices (a short bear market) before rebounding to a new bull market in a few months. But it’s important to remember there are always fluctuations along the way.

Bearish market outlook

On the other hand, a bear market indicates that the economy isn’t doing so well and stock prices display a downward trend. To be a true bear market, falling prices must drop 20% or more from a previous high over some time. Bear markets historically tend to be shorter-lived than bull markets.

Similar to how bull markets are not 100% positive, bear markets are not always bad either. This means that even though stock prices are declining, that doesn’t imply there aren’t any increases as well.

IMPORTANT! Keep in mind that the terms bullish and bearish markets don’t describe small, short-term movements. Those situations might just prove to be a temporary shift or a market correction, and they happen all the time. See bear trap for more details. However, they’re not necessarily indicators of a bull or bear market unless the trend continues for several weeks or months.

Individual investors

Investor confidence and attitude can greatly impact the stock market. During a bull market, investors feel the trend will continue and participate more frequently. A bear market, however, leads many investors to sell their investments, which perpetuates the decline.

Because investor attitude is so linked to the market’s performance, you may hear some investors referred to as bullish or bearish.

  • Bullish. If you’re a bullish investor, the general assumption is that the market is going up in some fashion. A bull might only anticipate growth in specific securities or industries or may predict an overall market gain. A bull investor is generally making more long-term investment decisions, but hoping to cash out before things turn bearish.
  • Bearish. Bearish investors typically bet that the market share prices will drop. Because of this, bears prefer quick trades over the bullish long-term trading style. Like bull investors, bears might only invest or track a particular stock or industry. At other times, such an investor might feel bearish about the economy as a whole if they anticipate a sustained and significant downturn.

Characteristics of bullish and bearish markets

Although the terms bear or bull market describe the long-term market fluctuations, several factors go hand-in-hand with getting to either end of the spectrum.

Psychology of investors

Both world events and what market participants think might happen influence the market heavily. Consider the stock market crash of 1929. The economy was teetering already, but mass panic crashed the market. This caused many to lose their life savings and brought the country that much more swiftly to the Great Depression.

It’s still true today that investors’ decisions can influence the stock market greatly. In a bull market, the practice is to make a profit from companies doing well, which in turn makes the overall market perform even better. In a bear market, that concept is turned on its head. This causes some investors to pull their money out of the market altogether or to put it into safer investments like fixed-income securities. This negative sentiment causes share prices to drop even more, further hurting the economy.

Supply and demand

The stock market also follows the laws of supply and demand, like pretty much everything else. For example, when the demand for securities is high but the supply is low, the competition raises share prices, which supports a bull market. Conversely, in a bear market, the supply is high but demand is low, so shares decrease in price.

Economic activity impact

The stock market and the economy are also inextricably linked because of huge corporations that trade on the exchanges. In a bear economy, people don’t spend as much money. If people don’t spend, corporations don’t make as much profit, layoffs happen, and share prices decline.

In a bull market, people tend to spend more and companies make more money. This drives the shares up, bolstering the economy in the process.

Investing in bull vs. bear markets

Since no one can predict exactly whether market conditions will result in a bull or bear market, investors rely on different investment strategies to help them make educated guesses on how the market will move. However, while serious stock traders may buy and sell daily, most of us just hope to earn enough money to have a comfortable retirement.

If you’re new to the stock trading world, consider these tips on trading during a bear or bull market.

  1. Invest during upward trends. During a bull market, when things are mostly on an upward trend, investing is easier; prices go up and people make money. Shares fluctuate of course, but the losses are usually minimal and temporary. This might be a good time to do some research and diversify your portfolio.
  2. Wait out a bear market. Investing in a bear market is much trickier. Many choose to ride it out, which isn’t a terrible strategy. Historically the market always comes back, so if you don’t plan to use the money soon, you can probably wait.
  3. Try short positions. If you’re feeling more adventurous, you can try taking short positions in a bear market, such as short selling or scalping. This can often reap profits from falling share prices but is not without considerable risk.

If you’re worried about the state of the market, you can always withdraw your money and invest it in other assets until the market improves. However, that is often a mistake. You could also choose to move some of your dollars to safer investments for the time being, such as fixed-income securities or defensive stocks. (Ironically, it’s just that type of activity in the investing world that extends a bear market.)

On the other hand, you may prefer to rely on a brokerage firm to handle your investments. With access to advanced analysis tools, brokerages (like the ones below) can help make the smartest decisions for your money.

Pro Tip

Market fluctuations are nearly impossible to predict, so knowing whether we’re headed for a bullish vs. bearish market can be extremely difficult. Therefore, most people are better off focusing on getting a well-diversified portfolio and investing for the long term.

FAQs

What are defensive stocks?

Defensive stocks are stocks that provide consistent dividends and stable earnings regardless of whether it’s a bearish or bullish market. Typically, well-established companies, such as Coca-Cola, Procter & Gamble, Johnson & Johnson, and utilities are considered defensive stocks.

What is short selling?

Short selling is essentially betting that a company’s shares will go down. You borrow a security and then sell it on the open market. Later, you buy it back at a lower price and take home the profits after paying back the original loan. This can be a risky business if you miscalculate, but it can also be very lucrative if you get it right.

What are fixed-income securities?

Like defensive stocks, fixed-income securities are generally a pretty safe investment decision to make. The returns aren’t very high, but neither is the risk. Examples of fixed-income securities include government bonds, corporate bonds, or CDs (certificates of deposit). They’re considered safe investments even in bear markets because of the regular fixed payments.

What is a market correction?

When the stock market suffers a sudden decline of more than 10% but hasn’t fallen into bear territory (meaning the loss is less than a 20% reduction in share prices), it’s considered a market correction. A market correction can also denote an individual asset. While they can seem alarming, they are often short-lived.

In March of 2020 at the start of the COVID-19 pandemic, for example, the market suffered a correction but managed to bounce back within just a few months. Technically that period was a bear market, but many financial experts describe it as more of a correction because it recovered so rapidly.

Key Takeaways

  • A bull market is when stock market prices are high and the economy does well.
  • When stock market prices drop 20% or more you are probably in a bear market.
  • Occasional fluctuations don’t create bull and bear markets; by definition, these trends must continue over an extended period.
  • Investing during bull vs. bear markets may require different strategies. These may include waiting out a downward spiral, investing during a bullish market, or opting for a short-selling strategy.
View Article Sources
  1. Your Investment Options — New York State Office
  2. Types of Stock — Texas State Securities Board
  3. How To Invest In The Stock Market: 8 Basic Concepts — SuperMoney
  4. Best Online Brokers for Stock Trading in 2022 — SuperMoney
  5. Best Stock Trading Apps in 2022 — SuperMoney
  6. Brokerages: Reviews & Comparisons — SuperMoney