When you talk about rivalry, what long-standing, fierce competition can you think of? One would say the burger wars between McDonald’s and Burger King, Marvel versus DC for comic book supremacy, or who has the better retail strategy between Walmart and Target. Well, another debate persisting in the financial world is that of a bull and bear market.
Financial markets are inherently like a rollercoaster – sometimes, they charge ahead like a bull, and other times, they hibernate like a bear. But does that mean your investments should suffer? Not at all! While both bull and bear refer to market performances, they have an entirely contrasting impact on your portfolio and investment decisions.
The bull and bear nomenclature
The two financial market labels – bull and bear – are metaphors based on animals that symbolize incredible strength and unpredictable moves. This holds true for stock market volatility as well, which is related to how each animal is said to attack.
A charging bull exhibits confidence and thrusts its horns upward, showing the upward trajectory of a growing financial market.
When a bear attacks, it slides its claws down, metaphorically representing a downward spiral in clashing markets. Another theory also equates bears hibernating to a market that has lost its drive.
In the financial world, analysts suggest that a bullish or bearish market is specific to prices rising or falling 20% or more from a recent trough or peak. Let’s dive into the details.
What is a bull market?
A bull market is characterized by rising investment prices for a sustained period and increased investor confidence. A bullish outlook on the market indicates investors can profit from buying and holding the assets. Such markets are typically associated with a strengthening economy, a growing demand for securities, and widespread positive investor sentiment.
A false sense of security accompanies the bull market, which exposes you to higher risk and overextends your portfolio. However, since the bull market runs longer than bear markets, their gains far outweigh the losses endured during the bearish phase.
The major indicators of a bullish market include:
- GDP growth – A country’s increasing GDP growth suggests a higher consumer spending power, which results in economic expansion. Hence, businesses see increasing revenue, which is the backbone of further investments and generating employment.
- Stock price surge – Stocks rally in a bull market, leading to an upward trend and uplifting investor confidence.
- Booming employment – Economic growth in a bullish market creates new opportunities and expands existing ones. A stimulated economy results in job opportunities and lowers unemployment rates.
There is no one-size-fits-all approach to investing in a bull market. However, based on your goals, risk appetite, and time horizon, you can capitalize on the upward trends of stock prices. Here are some key strategies you can follow:
- Buy and hold – Buy the stocks and hold on to them, hoping their valuation will increase.
- Momentum investing – Invest in stocks showing an upward price trend and sell them as they peak. However, this approach solely depends on continuing the existing marketing trend.
- Reinvest your dividends – Have you heard about compounding? Reinvest your dividends and optimize the bull market’s growth potential.
What is a bear market?
The cyclic transitions of the markets are difficult to predict. You can never put a finger on what causes the bear market. It can be a weakening economy, significant liquidation of securities, or a negative investor sentiment.
An investor with a bearish outlook believes the market’s downward trend will lead to more risks than rewards. Therefore, they consider panic selling quality assets with plenty of upside potential to defend themselves. As a result, investors move their money out of equities and into fixed deposits, causing a general decline as outflow increases. It is a common phenomenon for investors to opt out when bear markets plummet, and they miss out on the enormous gains that follow a bear market.
The primary indicators of a bearish market include:
- High unemployment – An economic downturn can cause businesses to struggle, decreasing consumer spending and leading to job losses.
-
- Fall in stock prices – Bear markets are characterized by a prolonged decline in investment prices, resulting in reduced buying activity. This pullback in the value of stocks versus projected earnings causes stock prices to fall in value. During a bear market, investors share a pessimistic sentiment, ignoring any good market news and continuing to sell their stocks, which pushes prices even lower.
- Temporary nature – Bear markets are short-lived. The bearish nature of the market officially ends when investors find attractively priced stocks and start buying them.
If you want to invest in a bear market, focus on preserving capital and seeking stability. Here are a few cautious approaches you can consider:
- Countercyclical industries – Invest in industries, such as auto repair shops or discount retailers, that prosper during downturns. You can also invest in low-priced stocks, which will return to higher prices once the bearish phase ends.
- Defensive stocks – Invest in defensive stocks or shares in companies providing essential goods and services, including healthcare and utilities. These stocks are comparatively less volatile and maintain their value during economic downturns.
- Hedging strategies – Shift your investments into bonds and other fixed-income securities or inverse ETFs to get regular investment payments that protect you against losses. For individuals nearing retirement, they may opt for a conservative investment approach, which implies less allocation to stock investments. Fixed-income investments, like treasury bonds, corporate bonds, or municipal bonds, tend to fare better during bear markets.
Be it a bull or bear market, you always be the GOAT
If a bull or bear market persists, your investments need not take a hit. No matter the market condition, here’s how to win in both:
- Diversification – Don’t keep all your eggs in a basket. Instead, spread your investments across different asset classes, sectors, industries, and regions to reduce exposure to any single risk factor. Balance your portfolio based on your risk tolerance to cope with volatility so you can stand tall in both bull and bear markets.
- Investing discipline – Patience is a virtue, especially when you dip your toes in the choppy waters of the stock market. If you are intimidated by the roaring bull market or the lull of bear markets, your investment plans can face a setback. Therefore, since market volatility is inevitable, you can stay the course with long-term investments and avoid making erratic decisions.
- In-depth research – One cannot predict the market movements. But, in-depth study and analysis of the market conditions, company fundamentals, economic indicators, and technical trends would go a long way in making an informed investment decision. You can also consult a financial advisor to help you navigate market fluctuations.
In conclusion, if you are a long-term investor, you can tame the bear or bull and eventually iron out volatilities without making a big dent in your portfolio.
Frequently Asked Questions
Q1) What are the similarities between bull and bear markets?
While there are various differences between bull and bear markets, they also share a few similarities:
- Investor emotion – Investor sentiment plays a crucial role in influencing market behavior. In a bull market, investor confidence and optimism drive up stock prices, whereas in a bear market, fear and pessimism lead to price decline.
- Economic cycles – An economic cycle comprises four phases: expansion, peak, contraction and trough. The bull and bear markets seamlessly fit into this natural cycle. Bull markets signify economic growth and expansion, and bear markets indicate contraction and slowdown.
- Opportunities to gain – In a bearish phase, investors can buy stocks at a lower price and yield significant gains when the market recovers. In a bullish market, investors can profit by selling stocks at higher prices.
Q2) How to predict a bull and bear market?
When it comes to bull and bear markets, history always repeats itself. If share prices rise, they are bound to fall sometime in the future. If the prices are at an all-time high, they will fall to establish a bear market. So, while you can’t precisely predict when a bull or bear market will start, certain events can change the market’s course:
- Certain international crises can affect economies, causing a bearish market.
- Positive news about a company’s huge market capitalization can cause a bullish market. Negative news, on the other hand, can lead to a bearish market.
- Any escalation in war zones can impact markets globally, resulting in a bearish market.
Q3) Can bull and bear markets occur simultaneously in different sectors?
Yes, different sectors can experience different market conditions under a phenomenon known as ‘sector rotation’. For instance, after the outbreak of the Covid-19 pandemic, an unforeseen ‘black swan’ event, the travel, hospitality, and retail sectors experienced bearish markets. However, due to increased demands, the healthcare and technology sectors experienced bullish markets.
*Disclaimer: Mutual fund investments are subject to market risks, read all scheme-related documents carefully. *
