What is Bear and bull markets

Introduction

The terms Bear and Bull Markets are often used  to describe general actions and attitudes  either of an individual asset or the market as  a whole.

 While the terms are easy to understand,  the impact either a bull or bear market can  have on your portfolio and wealth is undeniable. 

Although the origins of these Bear and Bull Markets terms are unclear,  the most common explanation is derived from the  way in which each animal attacks its opponents. 

A bull will thrust its horns up into  the air, while a bear will swoop down. These  actions have been metaphorically attributed to the  movement of a market. 

If the trend is up, it is  considered a bull market and if the trend is down,  it is considered a bear market. So how exactly can we define Bear and Bull Markets? 

Bull Market 

Defination

A bull market or bull run is defined as a period  of time in which the majority of investors are  buying. 

At this time, demand outweighs supply,  market confidence is high and prices are  rising. Investors who believe that prices will  increase with time are referred to as bulls.  

Essentially, the term bull market is used  to refer to the stock market, however,  it can also be applied to anything that is traded;  like bonds, real estate commodities and currency. 

CAUSE

• The term is usually reserved for  extended periods in which a large  portion of security prices are rising. This is  because prices of securities are continuously  rising and falling during trading. These  markets tend to last for months or even years. 
• Bull markets generally occur when the economy is  strengthening or when it is already strong.
• They  tend to happen in line with strong gross domestic  product and reductions in unemployment, and will   often coincide with a rise in corporate profits.
•  Investor confidence also rises during this time  and the overall demand for stocks is positive  together with the overall tone of the market.

EFFECT

• During these markets; Investors buy more stocks because their prices have been increasing,  investors are convinced they’ll keep doing so and therefore, they keep buying.
•  Due to supply  and demand, the prices are raised even higher. 
• Companies bet more on their companies. Buoyed by  consumer buying, businesses make more investments  which usually means hiring more workers  and paying existing employees more money. 
• Rates of unemployment decrease. Average wages go  up as companies compete for workers. Workers are  more likely to search for new jobs since they have  a better chance of finding one that pays more. 
• Inflation also occurs. Money is easier  to spend as it feels like it will be relatively easy to get. All of this spending  may lead to an immense increase in prices. 

Types of bull markets

 Stock 

All three major stock market indexes rise at the  same time and these include 

1. S&P 500, 
2. Dow Jones Industrial Average 
3. NASDAQ. 

A bull market  consistently makes higher highs and higher lows.  

A stock bull market occurs in a healthy economy  and a stock bull investment is driven by top-line  revenue, profit and price-to-earnings ratio.

 Gold 

Gold bull markets have historically occurred  during bull stock markets.

 This makes gold an  effective hedge against other investments and a  method of diversifying an investment portfolio and a proven safe haven in times of economic  turbulence. 

It is therefore often advised that  investors should allocate five percent or more of  their portfolio to gold or other precious metals.

Bonds 

Since the mid-1980’s bonds have been bullish which means that  investors have not lost money when buying a bond  because their rates of return were always  positive.

 A bull bond is a debt instrument  with a price that is expected to increase in  value if the stock market performs well. 

Many  believe there is a correlation between stock and  bond prices such that when stocks go up bonds tend to go down, and vice-versa.

 With a bull  bond, however, this correlation is positive. Certain fixed-income insecurities are structured  in such a way that makes them bull bonds. 

Secular

 A secular bull  market is a long-term trend that lasts five  to twenty years.

 A bull market can experience  a market correction and then resume its upward  swing without entering a bear market.

 A secular  bull market can have smaller bear markets within  it known as primary market trends and occur often. 

Examples of bull markets throughout history

Post world-war II Rally

• This took place from 1949 to 1956. 
• The S&P 500  rose 267% over 86 months, which works  out to a commendable annualised return of twenty  percent. Consumer goods were the main drivers and  also a strong export market helped companies grow. 
• However, all this came to an end because the Fed  raised interest rates and international  tension helped bring on a bear market.

Housing boom

• This occurred between  2002 and 2007.
•  The housing bubble began after  the federal government reduced interest rates  in the hopes of encouraging investment.
•  The financial institutions that encouraged  real estate investing, home financing and  trading in mortgages performed extremely well, until interest rates started to rise  again and borrowers started to default.  This resulted in the mortgage crisis. 

The longest bull run in history 

• This record-breaking bull market lasted from 2009  to 2020 – nearly eleven years – making it the  longest in history.
•  The S&P 500 gained over four  hundred percent after a low of 666 points in March  2009.
•  In February 2020 the Dow Jones Industrial  Average reached a record high of 29,551 points.
• The gains for the S&P alone amounted to over  eighteen trillion on paper.During this period,  unemployment was at a forty-year low. 
• Even during a bull market there will be dips, fluctuations and corrections. Misinterpreting  short term downward movements as the end of a bull market is easy. 

That’s why it’s important to  consider any potential signs of a trend reversal in Bear and Bull Markets from a broader perspective by observing  price action over a long period of time. 

Precaution during bull market

• The past has shown that bull markets don’t last  forever and investor confidence will begin to  decline at some point. This could be triggered  by anything from unfavourable legislation to unforeseen circumstances such as the pandemic.  
• Sharp downward movement of prices can start a  bear market where more investors are under the  impression that prices will continue to fall,  causing them to sell to prevent further losses. 
• A bull market generally lasts until prices have risen for so long that investors begin to  believe that prices will continue to increase.
• When prices fail to fall over time, investors  enter a state of irrational exuberance. They  start bidding prices above the actual underlying  value, over-valuing the investments. 
• This creates  an asset bubble where prices rise until the supply  of the assets resists any more rise in price. The moment investors begin to panic and sell,  the bubble bursts and prices start to fall.  
• If prices fall ten percent or less,  it’s considered a market correction.and at twenty percent investors are  distraught as the bear market begins.

Bear markets

Defination

The opposite of a bull market is a bear  market. It is characterised by falling prices  and is typically shrouded in pessimism.

It’s not easy to consistently predict when the  trends in the market might change. This is partly  due to psychological effects and speculation that  may sometimes play a large role in the markets. 

Cause

A bear market is when a market experiences  prolonged price declines.

It typically describes a  condition in which securities fall twenty percent  or more from recent highs amid widespread  pessimism and negative investor sentiment. 

If the economy is affected enough, bear markets  can sometimes lead to a recession. They can last  a few months to a couple of years, but the  economy is not viewed as being in recession until the National Bureau of Economic Research  decides that specific conditions have been met. 

 Effect

• These can be the depth and diffusion of  financial loss and the duration of the downturn.  
• A bear market usually comes to an end when prices  reach a point where they can no longer drop  and investor sentiment begins to rise. Consumer  and business confidence rise as well and market  prices begin a long climb.
•  When stocks gain twenty  percent from the recent low, a bull market sets in  marking a broad recovery in the market. 
• Bear markets can be difficult to trade in  especially for inexperienced traders. It’s  hard to predict when the bear market will end  and when the bottom price has been reached, since  rebounding is a slow and unpredictable process that may be influenced by a  number of external factors. 

Opportunities in bear markets

• Bear markets, however, present opportunities.  If your investment strategy is long-term. Buying during this market can pay off when the  cycle is reversed.
•  Advanced investors can use  strategies like short selling which is a way  of betting that an asset will decline in price. 
• While there have been several bear markets in  the U.S, the economy generally spends more time  expanding than contracting. This means that the  market spends more time as a bull than a bear. 

Examples Great depression bear market 

 1929 stock market crash.  

• This was the worst in U.S. history and  was caused by the 1929 stock market crash.  
• This was followed by the popping of an asset  known as buying on margin which allowed people  to borrow money from their broker and only put  down ten to twenty percent of the stock value. 

2008 bear market 

• This was the second-worst  by percentage and was caused by the 2008 stock  market crash.
• the failure of several financial  and insurance institutions and the reluctance  of Congress to restore confidence by passing  a bailout. 
• It came to an end in 2009 when the  government launched the economic stimulus plan. 

2020 bear market

Trend reversible

•  Bear markets come after bull markets.  After some time, bull markets reach a point  where investors experience irrational exuberance, causing prices to escalate.
• Assets being traded  on the market are overvalued and investors start  to anticipate falling prices. They begin to  sell their investments, causing prices to fall.  
• This loss of confidence can be caused by falling housing prices, economic circumstances,  high-interest rates, natural events or  anything that shatters positive sentiment. 

A bear market causes many investors to switch to  an investing strategy of maintaining their capital  instead of growing it.

 During a bear  market, instead of investing in stocks,  some might try to capitalise on  assets that have had better returns. 

Precaution during bear markets

• One can get ready for a bear market by reducing  risk in their portfolio. You could do this by  increasing the amount of cash and reducing  the number of growth stocks in your portfolio.  
• You can also choose mutual bonds or bonds  that perform better during a bear market. 
• Individual bonds are safer than bond  funds during a bond bear market. The reason for this is that their interest rates  and payments are fixed. If you hold onto them  until they mature you’ll receive the promised  amount unless the person issuing defaults. 

While the stock market has experienced  sustained periods of growth and decline,  along with blips and market corrections,  it has historically performed well.  

But past performance is no guarantee of future  results. Understanding the direction the market in Bear and Bull Markets  is taking and having a carefully constructed  long-term plan and diversified portfolio  can help you manage the ebbs and flows of  the market and achieve sustained success.