When investing, you may often hear it’s a “bear market” or a “bull market”, but for a newcomer to the space, this may sound foreign. In today’s Coffee & Cash, we’re going to define what each market means and how you as an investor should react.

For starters, a “bull market” is generally good for investors, and occurs when the stock market is gaining value, while a “bear market” is generally bad and is in effect when the market is going down. Let's take a closer look at these two types of markets and their relevance for your investing strategy.

What is a bull market?

According to the formal definition, a bull market takes effect when stock prices have broadly increased by at least 20% since the last market downturn. Bull market conditions can last for decades, and many successful investors have lost a lot of money by trying to predict the end of bull markets.

As an example, the U.S. stock market was in a bullish mode after recovering from the 2008 financial crisis in early 2009 until pandemic-related uncertainty caused a market crash (or bear market) in 2020. Does this mean that that market only went up every day for over 10 years? Well, no… There were many periods during that bull market run where the stock market dropped fairly significantly. Drops of 5, 10 and close to 20%. The chart below shows some of these volatile patches in the market, particularly around the end of 2011, 2015 and 2018. However, aside from some market corrections, which are generally defined as drops over 10%, a bull market trend persisted for more than a decade.

What is a bear market?

So, if a drop over 10% is a correction, what defines a bear market? A bear market is defined as starting when stock prices decline by 20% from recent highs and keep trending lower. Bear markets generally accompany broader issues in the economy. For this reason, they can be associated with people losing their jobs, GDP declining, and the stock market losing significant value. Bear markets almost never last as long as bull markets and can create buying opportunities for investors who are able to hold their nerve.

How do bull markets and bear markets differ?

If you want to know whether a bull or bear market is in effect, pay attention to these factors:

Stock market performance

Stock prices rise in a bull market and decline in a bear market. The stock market trend under bullish conditions is consistently gaining value, even with some brief market corrections. The stock market under bearish conditions is generally losing value or holding steady at depressed prices.

Change in GDP

GDP measures economic growth in the economy. Rising GDP is often the backdrop of a bull market, while falling GDP often correlates with bear markets. Bear markets are closely linked with economic recessions and depressions but note that you can experience a bear market in the stock market without necessarily going into a recession. Recessions are formally declared when GDP is negative for two consecutive quarters, while depressions occur when GDP decreases by 10% or more and the downturn lasts for at least two years.

Unemployment rate changes

A declining unemployment rate is common in a bull market, while a rising unemployment rate often occurs during bear markets. During bull markets, businesses are expanding and hiring, but they may be forced to lower their head counts during bear markets. A rising unemployment rate tends to prolong a bear market since fewer people earning wages results in reduced revenues for many companies and lower economic growth.

Prevailing interest rates

Low interest rates typically accompany bull markets, while high interest rates are associated with bear markets. Low interest rates make it more affordable for businesses to borrow money and grow, while high interest rates tend to slow companies' expansions.

So, now that you know the key factors to look out for to determine what type of market we’re in, how should you invest in a bull vs. bear market?

Growth stocks tend to perform well in bull markets, while value stocks are usually better buys in bear markets. Value stocks are generally less popular in bull markets based on the perception that, when the economy is growing, "undervalued" stocks must be cheap for a reason and they are generally not growing as quickly as their ‘growth’ stock counterparts.

The approach you take for investing in stocks in bull and bear markets depends mainly on your time horizon. If you do not need the money for decades, then it matters little whether the market is currently bullish or bearish. In fact, if you have time on your side, adding money slowly over time into bearish markets might result in some good opportunities to buy good quality stocks at a bargain. As a buy-and-hold investor, you probably shouldn't change your investing strategy much based on prevailing market conditions.

It goes without saying, that if you are retired and living off your money, or need the money in the short-term, then you need to have a plan for how to generate returns while maintaining an income in retirement through both good and bad markets. This generally means being pro-active with having cash on hand, being out of target-date funds and having the ability to pick and choose what types of investments you want to sell to generate cash flow.

The other part of investing in a bear market is the ability to look for opportunities. The stock market can be bearish even while bull markets are occurring in other asset classes and vice versa. If the stock market is bullish and you're concerned about price inflation, then allocating a portion of your portfolio to gold, commodities or real estate may be a smart choice. If the stock market is bearish, then you can consider increasing your portfolio's allocation to bonds or even converting a portion of your portfolio into cash.

Regardless of the current state of the stock market, it's important to have a financial plan and to review your investments regularly. If you need help creating or maintaining a financial plan or reviewing your investments, please feel free to book a complimentary meeting by calling our office at (518) 406-5624 or through the link on our website at simmonscapitalgroup.com.

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What do "Bull Market" and "Bear Market" really mean?