Bull vs. Bear Market: What's the Difference?
Stock markets are cyclical. They go through boom and bust times, which we refer to as bull markets or bear markets. During an individual's lifespan, the market will likely go through several cycles. Understanding them can help individuals make sound investment decisions, regardless of the cycle.
What Is a Bull Market?
A bull market occurs when the market grows aggressively over time. Specifically, it is when a primary stock market index, such as the S&P 500 or the Dow Jones Industrial Average, rises at least 20 percent from a recent low. The overall general economy typically also is growing as well, with levels of employment high. Investors are optimistic or "bullish," and the prices of companies' shares of stock are rising. The price of these shares continues to rise as increased investor confidence makes them willing to pay more.
Bull markets can last anywhere from a few months to several years. Over the past 91 years, bull markets have occurred for 78 percent of those years. The average bull market lasts 2.7 years, and the longest lasted for 11 years.
What is a Bear Market?
By contrast, a bear market is when a significant stock market index declines by 20 percent or more. This is in contrast to a market "correction," which occurs when a stock market index declines about 10 percent. A bear market results in an average market decline of 32.5 percent. A bear market is associated with a general decline in the economy when layoffs occur. Investing in a bear market can be risky, especially for individuals who may need access to their money within the next few months or years because prices may fall, and they will need to sell stocks for less than they bought them. Investors are often also pessimistic during a bear market and may sell shares, causing further tumble.
Bear markets can last for months or years, but historically, they've been shorter than bull markets. The average bear market lasts about ten months. The longest bear market lasted 61 months from March 1937 until April 1942 during the Great Depression. The average person will experience 14 bear markets in their lifetime. Bear markets also vary in intensity. Some have dropped the S&P 500 index more than 80 percent; others, just 21 percent.
Supply and Demand for Securities
Securities follow the rules of supply and demand just as retail goods do. In a bull market, many investors are optimistic and seeking to buy securities, while many others may be holding onto the securities they already own. This creates a high demand but low supply of securities and continues to drive prices up.
In a bear market, many investors are afraid and become less likely to buy securities. Some who already have securities also may sell them out of fear. This creates a low demand but high supply of securities which continues to drive prices down.
Investing For Long-term Success/The Bottom Line
Many investors build wealth by doing the opposite of what the rest of the market does; in other words, they buy during a bear market when prices are low and sell during bull markets when stock prices reach their peak. However, for most investors, predicting transitions is challenging.
Developing a long-term strategy works best for most investors. The strategy depends upon the individual's loan term goals. For example, adults in their 20s and 30s saving for retirement should strive to keep buying stocks in any market. They have time to weather bear markets when they occur without needing to sell stocks while prices are low. Working with a professional to diversify their investments also shields them from market fluctuations.
Those nearing retirement may need access to their retirement portfolio sooner and may want to switch to more conservative investments that are less affected by market cycles. Professional advisors also can help with asset allocations in these circumstances.
While the stock market goes through bull markets and bear markets cycles, it performs well over time. The key to building wealth through securities is working with a professional to develop a long-term strategy and allocate assets in a portfolio based upon strategic goals.