Bull vs Bear Market: What’s the Difference?

The term “Bulls and Bears” may not be so foreign to market watchers, traders, or investors, but what exactly does it mean, how did it come about, how do you trade during bullish and bearish markets, and what’s the difference between the two markets? Here is what you need to know:

TL;DR

• A bear market is characterized by a decline in market conditions, often linked to economic slowdowns, inflation, high unemployment, and negative investor sentiment. Examples include the tech sector struggling during inflationary periods, where stocks see steep declines.

• A bull market is where prices are rising or expected to rise, often tied to stable economic growth and high investor confidence. The 2009-2020 bull market following the Global Financial Crisis is a prime example.

• The terms come from how these animals attack; bulls charge upward with their horns, symbolizing a rising market, while bears swipe downward with their claws, representing a declining market.

• Bull markets are marked by economic growth, rising wages, and positive GDP, while bear markets are characterized by inflation, weak GDP, and higher consumer prices.

What Is a Bear Market?

A bear market is a financial market condition characterized by a prolonged decline in asset prices, typically defined as a drop of 20% or more from recent highs lasting at least two months. It is usually accompanied by negative investor sentiment, economic weakening, rising unemployment, and declining corporate earnings. 

During a bear market, investors tend to be pessimistic, often selling off stocks or shifting to safer assets, which further drives prices down. Bear markets can last from weeks to several years and may be triggered by factors like economic downturns, geopolitical crises, or market bubbles bursting. They represent the opposite of bull markets, where prices trend upward. (Source: Forbes)

Bear Market History: Bear Market Example

• The Great Depression bear market (1929-1932): Triggered by the stock market crash of 1929, the Dow Jones Industrial Average plunged about 89% over roughly three years, marking the worst decline in modern history and contributing to a severe economic depression.

• The 2007-2009 Financial Crisis bear market: The S&P 500 fell 51.9% as the subprime mortgage crisis escalated into a global financial crisis and recession, lasting about 1.3 years.

• The COVID-19 pandemic bear market (2020): The Dow Jones and S&P 500 dropped sharply in March 2020, with the S&P losing 34% in about a month, as the pandemic caused lockdowns and economic uncertainty.

• The Dot-com bubble burst (2000-2002): The S&P 500 lost roughly 49% of its value during this period when overvalued technology stocks crashed.

• Other historical bear markets include the market crashes of 1973–74, the 1987 Black Monday crash, and bear markets during various recessions, like in 1990 and the early 1990s.

What Is a Bull Market? 

A bull market is a financial market condition characterized by rising prices and positive investor sentiment, typically when stock prices increase by 20% or more from recent lows over a period of at least two months. It often coincides with a strong economy, rising corporate profits, low unemployment, and high investor confidence. 

During a bull market, investors expect prices to continue rising, which leads to increased buying activity and higher valuations across various assets like stocks, bonds, real estate, and commodities. 

Bull Market History: Bull Market Example

• The longest and most significant bull market: March 2009 to February 2020, where the S&P 500 rose about 375% during this nearly 11-year run after the 2008 financial crisis.

• Post-World War II bull market: From June 1949 to 1956, the S&P 500 surged roughly 266%, fueled by economic growth and consumer spending.

• The Reagan Era bull market: August 1982 to October 1987, with a 229% gain driven by economic policies and corporate mergers before the 1987 crash.

• The Dot-com boom of the 1990s: Late 1990s to March 2000, the S&P 500 gained approximately 417% during rapid tech growth and innovation.

• The Roaring Twenties: 1920 to 1929, a period of massive stock market gains driven by speculation and economic expansion before the Great Depression.

These bull markets are characterised by sustained price rises, strong investor confidence, economic growth, and often innovations or favourable policies driving optimism. (Source: Finance Yahoo)

What Is the Origin of the Term Bulls and Bears?

There are numerous hypotheses about where this term came from. One of the most popular ones is that these terms are derived from the way bulls and bears attack. Accordingly, whereas bulls swipe their horns upwards (marking a rising market), bears swipe their claws downward (reflecting a slowing or lowering market). 

Macroeconomic Indicators of a Bull and Bear Market

Bull markets are characterized by:

•  Positive Interest Rates: During bull markets, interest rates are often deemed positive because they suggest investors are earning more on their investments, and market confidence is high.​

• Higher GDP: GDP figures tend to be higher during bull markets due to increased economic demand, sales, and turnover.​

Bear markets are characterized by: 

• Higher Inflation: In contrast, bear markets are marked by inflation, higher consumer prices, and lower wages.​

• Risk-Averse Sentiment: In bear markets, interest rates may exert pressure on investors as some tend to withdraw from the market, reflecting increased caution.​

• Lower GDP: GDP is usually lower in bear markets as demand and production decrease, leading to weak sales and turnover. (Source: CFA Institute)

Trading Strategies for Bull & Bear Markets

Trading Bull Markets

When trading in a bull market, traders may want to consider:

• Buying early in the bull run to potentially benefit from the upward momentum.

• Taking long positions (buy stocks or assets expecting prices to rise).

• Use leveraged derivatives like CFDs cautiously to amplify gains.

• Not holding onto losses for too long; set clear exit plans if prices drop below trend lines.

• Taking profits regularly at intervals to secure gains and reduce risk.

• Following the market momentum carefully, analyzing trends before making moves.

• Buying call options to benefit from price increases while limiting downside risk.

• Employing investment strategies like value investing (buying undervalued stocks) and growth investing (targeting fast-growing companies).

• Using dollar-cost averaging, investing a fixed amount periodically to reduce impact of volatility.

• Buying on retracements or dips during the overall upward trend for better entry prices.

• Staying vigilant for signs the bull run may be ending to lock in profits or prepare for trend changes.

Trading Bear Markets

When trading in a bear market, traders may want to consider:

• Taking short positions by borrowing and selling stocks, aiming to buy them back at lower prices to profit from falling markets.

• Using put options to gain the right to sell stocks at a set price, profiting if prices decline.

• Employing bearish option spreads like bear put spreads and bear call spreads to profit from expected declines while limiting risks.

• Consider short ETFs (inverse ETFs) that increase in value as the market or index falls.

• Using CFDs or other derivatives to short-sell stocks or indices exposed to bear market pressures.

• Identifying and shorting sectors or stocks most affected by the bear market catalyst (e.g., travel stocks in a pandemic-led bear market).

• Diversifying and hedging by balancing long and short positions and by investing only what can be risked.

• Using dollar-cost averaging and look for value opportunities in discounted shares to prepare for eventual market recovery.

• Staying vigilant to close positions or hedge when downside risks appear to limit losses.

• Avoiding panic selling; maintain a strategic approach considering market cycles.

The above are solely for educational purposes and do not constitute trading or investing advice 

Are We in a Bull or Bear Market?

The answer to whether or not we are in a bear market or will continue to be in one is neither black nor white. We’ll have to be patient to see how the market fares in the coming days or months in order to decide for ourselves. 

Conclusion 

In summary, whether the market is bullish or bearish depends on a variety of macroeconomic factors, including inflation, employment rates, GDP, and market sentiment. While recent events have caused significant declines, the future remains uncertain, and analysts are divided on whether we are entering a recovery or heading deeper into bearish territory. Staying informed and adapting strategies are key for traders and investors navigating these volatile times.

*Past performance does not reflect future results. The above are only projections and should not be taken as investment advice.