Bull vs. Bear Markets – What’s the Difference?

We’ve all heard the market referred to as “bull-ish” or “bear-ish,” but what do these terms actually mean? 

These animal names for market trends are meant to illustrate how the market grows or contracts on a fairly consistent basis. Recognizing the signs of a bull or bear market can help you make smart investment decisions and navigate economic uncertainty with as little risk as possible.

Key Takeaways

• Bear and bull markets occur when the overall value of broad market index funds decreases or increases by 20 percent or more from market highs or lows..
• These types of market fluctuations are relatively common, and investors can expect to navigate many of these prolonged shifts over the course of their careers.
• Bull markets typically tend to last longer than bear markets, with some bull markets extending for several years while bear markets rarely last longer than a couple of years.

What’s a Bull Market?

A bull market is, generally speaking, a period of time during which stock prices are elevated and investors are optimistic about the health and performance of the market overall. Many financial experts agree the market has become a bull market when prices on broad market indices like the Dow Jones Industrial Index, S&P 500 or other similar indices rise by at least 20 percent from market lows.

The term “bull market” is said to come from the image of an attacking bull throwing a person into the air with its horns, representing rising prices and upward movement. Conversely, the term “bear market” is meant to conjure an image of a bear swiping down with its claws, indicating lowered prices and downward movement in the market. 

What Causes a Bull Market? 

A bull market is generally a sign of good overall market health and a growing economy. Signs of rising stock prices and other positive market indicators, like falling unemployment rates, encourage investors to buy into the market in an attempt to ride the wave while prices continue rising.

This type of market activity is largely rooted in investor confidence. When people see signs of a strong economy, it’s more appealing to invest in riskier financial instruments like stocks, rather than lower-return investments in more secure assets like bonds and other fixed income securities.

This investor behavior has a compounding effect on the bull market, as more investor activity leads to further increases in perceived value and actual stock prices. Because of this, bull markets tend to have an extended effect on the market. It’s not uncommon for a bull market to last several years as more investors get into the game and prices trend upward over time. 

What’s a Bear Market?

While a bull market suggests a strong, growing economy and rising stock values, a bear market shows the opposite. Generally speaking, a decrease of 20 percent or more in the broad market index fund values is classified as a bear market.

What Causes a Bear Market? 

While bull markets are a sign of strong investor confidence, the opposite can be said for bear markets. When signs of an economic downturn are apparent, like increasing unemployment and other market trends like decreased leisure spending and increased cost of living expenses, investors are less excited to get involved in the market.

This loss of confidence has a cooling effect on market values, bringing stock prices down as many people reduce the amount of money they’re investing overall or choose to put their money into more secure assets, like fixed income securities.

Bull vs. Bear Market Signs and Differences

Not every market upturn is a bull market, nor is every downturn a sign of bearish activity. There are some key indicators investors can look for to determine if the market has fallen into one of these two categories.

Length of Markets

Generally speaking, the market needs to show signs of this sort of upward or downward movement consistently before a shift in market activity can be classified as either a bear or bull market.

Once the market has fallen into one of these two categories, the length of time to expect this sort of trend to continue depends on whether the market is experiencing growth or shrinkage. While a bull market can last several years, bear markets typically only apply downward pressure on the market for about a year or two. These are not hard and fast rules, but typically the reduction of prices in the stock market that accompanies a bear market will eventually reach a point where investors are willing to take larger risks to recognize larger returns. 

Investor Behavior

Investor behavior and activity in the stock market can often be based largely on confidence and overall feelings about the economy. The allure of catching a rising wave in the market, or fear about prices plummeting even further when trends are headed downward, can have a big effect on how investors choose to allocate their limited resources.

This sort of overall shift in confidence among investors is a strong contributor to how the market is classified, and it can cause a sort of snowball effect as hesitance to invest reduces prices further or enthusiasm drives prices up. 

Economic Activity

The health of the market is often an indication of the overall economy, and overall economic trends can offer insight into current shifts in the market.

Increased spending on leisure activities or major purchases like vehicles and real estate are good signs the economy is performing well, and could be a sign that an extended period of increasing stock prices is on the horizon. Similarly, a downturn in this sort of consumer behavior could indicate a bear market is coming soon. While these sorts of signs are not always perfectly accurate.t.

How to Invest During a Bear Market vs. Bull Markets

Many investors try to predict the onset of a bull or bear market in order to improve the allocation of their investments in the short term. While a well-balanced portfolio should be able to weather the storms of a bear market and capitalize on the growth of a bull market, there are some popular strategies some investors choose to employ to maximize their assets’ performance in these times.

Bear markets can present a great deal of fear and uncertainty for investors. While existing assets could see significant drops in value, many advisors recommend holding on to stocks and being patient with the expectation that the market will always correct itself. 

Once stock prices reach a sufficiently low point, many investors will buy into the market in an attempt to secure assets at the lowest possible price before prices begin to rise back to regular levels. While this sort of approach is inherently more risky than simply waiting out the bear market, it can recognize major upsides for some investors.

Bottom Line

Both bear and bull markets can present a degree of uncertainty for investors, but a well-balanced investment portfolio should be able to make the best of any market trends that arise. If you’re seeing advice on how to develop a portfolio that protects you from market uncertainty, engaging services from Horizons Wealth Management is a great first step in securing your financial future.

Bull vs. Bear Market FAQ