On March 11, 2020, news organizations ran a story about a notable passing. It served as the main business story for just about every financially oriented newspaper, news program, and news website in the United States. The bull market’s historic 11-year run, beginning in the wake of the housing crisis of 2008-2009, had come to a close.(1,2)
Yet, to many Americans, the “bull market” and its counterpart, the “bear market,” may represent abstract ideas that don’t relate to their day-to-day lives. There are also some misconceptions that people might carry about what exactly defines a “bull” or “bear.”
Let’s take a closer look at these terms, what they mean, and how they can help us understand the financial markets. Keep in mind that investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. And investments, when sold, may be worth more or less than their original cost.
What do these phrases mean?
A bull market describes a period of time when stock prices are trending higher. Often, but not always, the economy is expanding, and employment is strong.(3)
In contrast, a bear market is defined by a decline of 20% or more from a peak price in one or more of the major stock indices. A bear market can indicate the economy may be entering a downtrend, and a slowdown in employment may be anticipated.(3)
Bear markets shouldn’t be confused with other declines, which might be described as “pullbacks” or “corrections.” Typically, a period of consolidation occurs a number of times during a bull market.(3)
Where do these names come from?
There isn’t an exact origin for these terms, but many connect the bear to the old proverb advising against “selling a bearskin” before the bear has been caught, which is not unlike counting chickens before they’re hatched. Over time, this image continues to appear in literature and everyday conversation in relation to markets, with the “bear” having an aggressive connotation.(4)
The images of two powerful, aggressive beasts came into use during the Elizabethan era, a time when these two animals were used for sport. Whereas a bull might attack with its horns going up, the bear attacks with its claws in a downward motion. There is also a tendency in literature and mythology to ascribe nobility to bulls and savage aggression to bears. In truth, both animals are trying to get by, just like everyone else!(4)
How long do these market types usually last?
There isn’t a standard duration for a bull or bear market. These terms are used as a way to describe the behavior of the market, so the length of each depends on the actions of those interacting with the market (e.g., the investors) as well as how those investors are reacting to current events, economic factors, or simply the world around them. Sometimes, there’s a very obvious cause for a bull market to go “bearish” or vice versa. It’s fair to say that the COVID-19 pandemic and its effect on the economy have had a direct impact on the end of the recent bull market. There are shorter bull markets, of course, like the one that began in October 1966 and lasted just two years and two months.(5)
Bear markets can be similarly diverse in length. The Standard and Poor’s Index, in its various iterations, has had 20 bear markets since 1928, ranging from 33 days in 2020 to 929 days from early 2000 to late 2002—the latter, a period often referred to as the “Dot-Com Bubble Burst.”(6,7)
The S&P 500 Composite Index is an unmanaged group of securities considered to be representative of the stock market in general and cannot be invested into directly. Often, but not always, market watchers are referring to the S&P 500 when they are describing the market’s bull or bear market trend. Remember, past performance does not guarantee future results.
How should you respond to a bull or bear market? If you’re reading this, you’re hopefully bringing your wishes and concerns to your financial professional, who can explain how your investment strategy is reacting to the markets. The idea of cultivating a financial strategy means taking such chutes and ladders in your stride.
What your financial professional knows is that, yes, the news can be provocative, and some events may present opportunities for investors. They also understand that ups and downs have historically been part of the investing process and may sometimes require no action. If you invest long enough, you may experience any number of bulls-to-bears and back again.
This may not be a very exciting answer, but it informs many financial strategies. The trust relationship you have with your financial professional means that they have taken the time to understand your goals, risk tolerance, and time horizon to create an investment strategy that fits your unique circumstances.
What to consider during a bull market
Since a bull market indicates that stock prices are trending upward, you will, in many cases, not be taking much action at all. That’s where the informed suggestions from your financial professional come into play.
What to consider during a bear market
Bear markets might make you a little more nervous. Your first question to your financial professional might be, “should we take any action?” When it comes to an investor’s financial goals, bear markets often cause them to reconsider their tolerance for risk when measured against a time horizon they may have had in mind.
There is always the risk that unforeseen events are around the corner, which could cause markets to go bull or bear. But by working with a financial professional, you may be better prepared to weather the market’s cycles while still pursuing your investment goals.
REFERENCES:
- USNews.com, March 11, 2020
- CNN.com, March 11, 2020
- Investopedia.com, March 23, 2020
- Investopedia.com, April 9, 2020
- CNN.com, April 23, 2019
- Yardeni Research, Inc., March 23, 2020
- GlobalFinancialData.com, August 29, 2018. Standard and Poor’s introduced the S&P 500 Index in March 1957. The S&P 90 stock index was introduced in 1928.
