As many investors as there are, that many opinions and views about the market, there are going to be. This is what makes it more exciting to participate in the stock market. An essential flavour of financial markets is a divided sentiment about where the market is headed. Sometimes, the market sentiment is dominated by the ‘bulls’, and at other times, the opinion leans towards the ‘bears’. Now, bull v/s bear market may seem too confusing. Let us simplify it for you.
Bull V/S Bear Market
A Bull Market
A broad definition of a bull market includes stock prices. To explain, in a bullish market, prices of securities will continue to rise. Simultaneously, investor expectation will also lean toward continuing price increases. Though the usage is commonly applied to stock market, it may include securities like bonds, real estate, and other commodities too. An important point to note is, a bull market lasts for a more extended time. A one-off rise in prices is not referred to as a bull market.
Though there is no metric to define a bull market, a largely accepted rule is that a bull market is a period between a 20% rise in stock prices after a 20% drop ahead of another 20% drop in stock prices.
A Bear Market
A bear market is the opposite of a bull market defined by falling prices and dim expectations that they will rise. A bear market is also reflected in low expectations about the revival of economic growth. In a bear market, the asset prices generally drop sharply, and investor sentiment is usually negative and pessimistic in the markets. The best example of a bear market was the US stock indices that fell into a deep bear market between 2007 and 2009, along with many other global stock indices during the financial crisis.
Bull versus Bear Market: Nomenclature
The bear market gets its name from a bear’s downward motion while attacking its enemy. Similarly, a bull, one that you can find outside the Bombay Stock Exchange in Mumbai, is depicted as raging with its horn pointed upwards, symbolising an aggressive rise.
Bull Versus Bear Market: Economy
A bull or bear market closely follows economic cycles. This is because companies whose shares trade in the stock market are essential vehicles to keep the economic engine of any country revving. For example, the beginning of a bull indicates that economic expansion is in the offering. It is the positive sentiment around economic growth, employment and consumer spending that lays the groundwork for a bull market. But in a bear market, the economic growth goes for a tailspin, accompanied by weak job growth, and stalled consumer spending.
Bull versus Bear Market: Indicators
Bull market indicators
- – High national income
If national income or GDP (gross domestic product) is high, it indicates higher consumer spending, higher private investments and foreign income. This leads to a positive expectation that companies and businesses will do well.
- – Stock prices rise
A most significant indicator of a bull market is a consistent and broad-based rise in stock prices. This is because there is more demand to buy stocks than traders who are willing to part with their shares. A bull market run can occur in specific asset classes or sectors too. This is driven by an expectation that if the economy is doing well, businesses are doing well and the markets are only set to rise from this point, due to the positive momentum.
- – More traders take long positions
Long positions refer to buy positions in the stock market. In other words, more traders are seen buying stocks to take advantage of the growing markets and rising prices.
- – Job growth
A thriving economy and job growth are more likely outcomes in a bull market. When the economy is in an expansionary phase, government and private investments are high, the workforce also grows.
- Examples of a bull market
- The period between the 1940s and 50s, US stock markets saw a bull run
- The period between 1980-2000, before the dot com bubble went kaput
- The ten-year bull run in the US markets post the housing crisis
Bear market indicators
- – Sluggish economic growth
A bear market is marked by a decrease in GDP or gross domestic product, reduced capital flows, and slower economic expansion. When economic development is stalled, and businesses slow down, the market sentiment turns negative, and investors start pulling out of the markets. Due to the sluggish economy and reduced consumer spending, businesses are unable to make large profits. This affects their stock valuations too.
- – Decreasing stock prices
Asset prices start falling in a bear market. This is because more stock traders tend to sell off their stocks before prices fall further. But there are few buyers for these stocks at low prices. That is because the hope for recovery in stock prices starts dimming in a bear market.
- – More traders take short positions
As asset prices fall, a downward spiral is unleashed in a stock market. More traders take short (or sell) positions to sell off their stocks at minimum losses. One may think, lower stock prices should be an excellent buying opportunity as stocks are cheaper. But since the market expectation is mostly negative, the majority of the traders fear they will be stuck with the securities for an uncertain amount of time as prices may not recover.
- – Poor job growth
When businesses slow down, companies begin cost-cutting exercises and eventually start reducing the workforce. This also affects consumer spending further with people having less income to spend. This does not bode well for the stock of these companies that are traded in the stock market. This, in turn, affects the market sentiment negatively pushing the markets into a more in-depth bear market.
- – Examples of a bear market in financial history
- Great depression post-1929 market crash in the US was marked by job losses, the onset of poverty and a long period of socio-economic struggle.
- Dotcom bubble that went bust after 2000 left thousands of people without jobs, many tech companies had to shut shop and investments washed away.
- The Lehman crisis in the US in 2007 ripped through global financial markets, setting off a dark period in the American as well as global stock markets. Though the markets eventually recovered, but not before causing significant job losses, loss of homes and crash in asset prices.
Before one invests in the stock assets, it is essential to have a sense of where the market is headed and if the market is in a bull or bear phase. Knowing this will help new investors to pick investment strategies wisely according to bear or bull markets. For example, during a bear market, investors prefer to invest in market-resilient companies like power or electricity-producing companies that are owned by the government usually. These stocks are not affected by economic cycles and are considered safe.