Bull vs. Bear Market: Definitions Every Investor Must Know

If you see an angry bull or a bear headed your way, you probably don’t want to stick around to see why it’s coming after you. These formidable animals could cause serious damage, but referencing these animals has a completely different meaning when it comes to the stock market.

Here’s what these animals mean for you as an investor, including the bull versus bear market definitions.

What is a bull market?

The exact definition of a bull market depends on whom you ask. It could be a general sentiment or a technical analysis during a period of time, either short term or long term. The U.S. Securities and Exchange Commission states that a bull market occurs when stock prices are increasing and the sentiment about the market is generally optimistic. Specifically, it states a broad market index, one that covers companies of all sizes, must rise 20% or more over at least a two-month period.

This isn’t the only definition, though. The Merriam-Webster online dictionary defines a bull market as “a market in which securities or commodities are persistently rising in value.” This definition focuses more on the general trend without mentioning technical benchmarks, such as the 20% rule of thumb.

Other definitions may also exist depending on whom you ask. But the general idea is that a bull market is one where investors feel optimistic about the present and future conditions of the market.

What is a bear market?

As with bull markets, bear markets have a definition that may vary depending on whom you ask. The definition stated by the U.S. Securities and Exchange Commission is a period when stock prices decline and the markets have a pessimistic sentiment. Technically, such a period is defined as a bear market when a broad market index declines 20% or more over at least two months.

Of course, other definitions also exist. Some use specific pricing methodologies to determine a bear market. One may define a bear market as a 20% downturn from an index's most recent highs. Others may simply look at the intra-day movements, which are prices that occur throughout the day that could be higher or lower than the closing amounts.

One example is the NASDAQ exchange definition, which considers a market bearish when it breaks below its 200-day moving average. The key is knowing there is no one absolute definition of a bear market, but it's a time when investment decisions tend to be pessimistic.

The main characteristics of bull and bear markets

Bull markets and bear markets tend to have certain characteristics that often, if not always, appear along with each of them. This could include certain trends in economic activity, changing demand for stocks, and shifting investor psychology.

Here are some of the main characteristics each market has and what they mean:

Economic activity level

Gross domestic product, the level of economic activity in a country based on the amount of goods and services produced, may vary depending on the given stage in a bear or bull market.

Generally, bull markets tend to occur during times of economic expansion. As companies' performances exceed expectations, stock prices rise. This may push more investments into a bull market and see increasing investor confidence.

Similarly, bear markets tend to occur during times of economic volatility or contraction. Companies do not perform as expected or experience declining profitability. This, in turn, may lower their stock prices and push the markets into a bear market.

We may not always know when we’re in a bear or bull market. For example, the financial markets may still see volatility in prices on their road to recovery from a recent bearish period. This could make it difficult to pinpoint the shift in investor sentiment. Once investors catch on, the bear market may end.

It’s also important to realize that economic activity may not always align with the asset classes or index prices you’re using to judge a bear or bull market. For example, bullish sentiment in the crude oil market may point to increased industrial activity, but this is not always true. Sometimes, such bullish sentiment may be the result of other factors, such as geopolitical risks.

Supply and demand of stocks

In general, stock prices tend to drop when their supply level exceeds the demand from potential buyers. If such a condition persists, it could trigger a bear market. The opposite could also hold true with a bull market.

It’s important to note that although a broad market index may enter a bear market, certain assets may see increased demand as investors seek protection. For example, investors may flock to dividend stocks during a bear market to add more diversification and earn a fixed income. This may prevent this investment sector from joining the rest of the bear market.

Safe-haven appeal

Safe-haven assets are investments people feel comfortable retreating to during a down market in the hopes of protecting their money. As such, demand for safe-haven investments increases when markets are performing poorly and during bear markets. When markets start performing well and enter a bull market, demand for safe-haven assets often decreases.

Investor psychology

During a bull market, people may generally feel positive about the future as their investments perform well in the market. Bear markets tend to bring out pessimism, but some people may see an opportunity to start investing during a recession.

There are short periods at the beginning and end of each cycle where investors feel uncertain whether the market has shifted direction. In these times, the sentiments may be mixed until the economic conditions are more revealed through persistent trends.

Unemployment rate

The unemployment rate isn’t a factor used to determine bear or bull markets. That said, the rate has displayed a degree of correlation with bear and bull markets over the last couple of decades. During times of economic contraction and bear markets, the unemployment rate usually rises. Conversely, it typically decreases as the economy expands during bull markets.

Are we in a bull or bear market?

It might be challenging to tell whether we’re in a bear market or a bull market at any given point in time. It may feel like we’re in a bear market, but if the price of a particular index never reaches the 20% decline from the recent high, technical indicators still point to being in a bull market. Similarly, it may feel like we’re in a bull market, but the recent high may have peaked below the level of a previous bear market.

Stocks went through a quick but sharp bear market in March and April 2020 due to the coronavirus pandemic. However, by July of the same year, the stock market looked bullish and continued to recover during 2021. Since entering that bull market, stock prices have not dropped by 20% or more from a recent high. This might point to a lack of bearish sentiment in the market as of early 2022.

Are we experiencing a market correction?

A market correction is typically viewed as a decrease in stock prices by 10% from a recent high. Based on this definition, the S&P 500 entered correction territory in January 2022, as it fell more than 10% from its high recorded in 2021.

This correction has widely been blamed on inflationary pressure, the Federal Reserve’s anticipated rate increases in 2022, and geopolitical uncertainty around Russia and Ukraine. Other factors may contribute to a correction, such as a fear of a potential recession or declining profitability.

Did we just have a market crash?

A market crash is a fearful term that refers to a quick and steep decline in asset prices. An example would be the crash that began with the coronavirus pandemic, which resulted in a drop greater than 30% in the S&P 500 index.

Market crashes are commonly associated with major events in history, such as the Great Depression, the coronavirus pandemic, and the 1987 Black Monday crash. They often happen quickly with little forewarning and result in large declines in asset prices. That said, based on the market activity so far in 2022, we have not experienced a market crash.

How long does a bear or bull market last?

A bear or bull market lasts until one ends and another begins. This can only be viewed in a historical context, as you would need to find the low points and high points in an index’s historical charts. What may seem like the end of a bull or bear market may only be a correction until a 20% price change threshold is reached.

That said, historical data shows that bear market trends may be shorter-lived than bull markets. This means we’re in a bull market much more often than we are in a bear market.

What can you do as we enter a bull or bear market?

Each person’s investing circumstances are unique. Whether we’re in a bull market or a bear market, one thing holds true for every person. You could benefit from sticking to your investment plan and incorporating market contingencies into your plan.

For example, your plan could include an investment strategy for whether you should maintain your investment or change your investment portfolio allocation depending on the market. It could also include what types of investments you want to invest in during periods of different market conditions. For example, some investors may use exchange-traded funds or real estate investments during bullish markets. Others may resort to individual stocks or commodities.

Another key to a solid investment plan is having a diversified portfolio. Essentially, this means you own several assets rather than just one or two. If one investment performs poorly during the current market cycle, other assets in your portfolio may outperform to offset that poor performance. One way to do this is to invest in index funds.

Historically, long-term investors with diversified portfolios tend to do well if they stay invested through both bear and bull markets, according to average stock market returns. Additionally, stock indexes, such as the S&P 500, continued to record new all-time highs over the years despite experiencing several bear markets.

However, it’s important to keep in mind that past performance does not guarantee future results.

FAQs

Bottom line

A bear market may occur when stocks drop 20% or more over at least two months. A bull market takes the exact opposite direction, reflecting stock gains of 20% or more over at least two months. Depending on where you are in your investment journey, you may prefer one market over another. But you may invest through both types of markets during your lifetime.

No matter which type of market we’re currently in, investing is a personal activity. There are several things to do before you invest. One of those is making sure you only invest based on an investment plan you’ve created.

If you need help coming up with an investment plan, you should consult an investment professional. These professionals can help you determine how you may want to change your investments during a bear or bull market or whether you should stay the course.

Once you have an investment plan to help you learn how to invest money, it’s just a matter of finding a good investment firm or investing app and getting started.

FinanceBuzz is not an investment advisor. This content is for informational purposes only, you should not construe any such information as legal, tax, investment, financial, or other advice.

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