The world economy revolves around supply and demand. Changes to these variables can impact consumers and businesses worldwide. Economists use the terms bull market and bear market to describe the current state of the economy. We’ll discuss the differences between these two markets and how investors can navigate both markets.
What is a Bear Market?
A bear market is an economic timeframe with declining asset prices and economic contraction. Investors become fearful during a bear market and may hold onto more cash and sell some assets. Extremely fearful investors may sell all of their assets to avoid additional losses. Many investors play it safe in a bear market and avoid financial risks. Economists look at the stock market to determine if we are approaching a bear market or have already entered it. Economists view a broad 20% decline from all-time highs as a bear market. Economists call it a bear market because a bear swipes down when attacking.
What is a Bull Market?
A bull market is an economic timeframe with rising asset prices and economic expansion. Investors become more confident during a bull market and invest in equities. They may buy crypto, stocks, real estate, and other assets. Overconfident investors may buy assets on margin and utilize high-risk, high-reward strategies. Economists define bull markets as a time when stocks rise 20% after two 20% declines. Economists call it a bull market because a bull jumps up with its horns when attacking.
Bear Market vs. Bull Market: How Do They Differ
Bear markets and bull markets each present investment opportunities. However, the economic outlook and optimal strategies vary for each market. Therefore, you should understand these differences before investing in either market.
Market Performance
The broader market declines or stays stuck during a bear market. Most assets produce negative returns for investors. Bull markets provide investors with strong market performance. Bullish markets don’t go up forever and may encounter several corrections during their lifetimes.
GDP
GDP falls during a bear market and rises during a bull market. When GDP declines, companies go out of business, and others lay off employees. Most employees don’t see wage growth and settle with their current jobs. This dynamic lowers consumer spending, which can decimate any economy. Recessions occur during two consecutive quarters of GDP declines. Depressions take place if GDP declines for two straight years.
When GDP increases, consumers spend money, and companies report strong revenue growth. As a result, companies will have more financial flexibility to offer raises and competitive salaries to incoming employees.
Unemployment Rate
The unemployment rate increases during a bear market. Fewer companies can afford payroll and stay in business. Most employees feel less confident about approaching their boss for a raise. A rising unemployment rate prolongs bear markets since consumer spending and productivity decrease.
The unemployment rate decreases during a bull market. More people find jobs, and companies raise salaries to retain talent. As a result, most employees feel more confident about approaching their boss for a raise.
Inflation
Inflation can occur in bull and bear markets, but it’s often more pronounced in bull markets. A hot economy leads to price increases. Employers pay employees more money because some request raises, and a low unemployment rate limits an employer’s outside options. Employers will then raise prices to counter salary increases. This cycle continues during a bull market. A sizzling economy can generate runaway inflation.
Bear markets can lead to deflation. More people hold onto their money, prompting businesses to lower their prices to get people back into the stores. During deflation, the dollar’s value increases, and the fiat currency can buy more goods and services than before the bear market.
Interest Rates
Bear markets typically have high-interest rates. These interest rates slow down businesses, which hurts consumer spending. Some bear markets emerge because of interest rate hikes designed to counter runaway inflation. Controlling inflation prevents the costs of goods and services from rising endlessly, but rising interest rates push us closer to a bear market.
Bull markets typically have low-interest rates. Businesses can borrow cheap money that helps them expand and pay for more employees. Lower interest rates help consumers buy homes and cars, which in turn helps companies. Always keeping interest rates near zero can trigger inflation.
Economic policymakers have to balance interest rates and inflation. Failing to raise interest rates can lead to absurd levels of inflation. However, raising interest rates too quickly and by too much can trigger a recession.
How To Invest in Bear vs. Bull Markets
Bear and bull markets have different dynamics that impact asset movements and investment strategies. Knowing your options can help you navigate bear and bull markets and outperform the benchmark return. Investors should consider their risk tolerances before adopting a plan.
Bear Market
Investors take fewer risks and typically play defense. These investors look for value stocks with wider margins of safety. Investors in a bear market look at an asset for what it is rather than what it can become in the future. Cheap investments offer some protection from market downturns. Depressed valuations don’t give them much room to fall. Investors often look at a stock’s P/E ratio to determine if it’s undervalued or not. Investors burned by a bear market can hold onto assets if they have longer time horizons. People approaching retirement may get out of a bear market sooner.
Some traders will short stocks with high valuations. These traders hope to benefit from declining prices. Traders close their short positions by buying back shares once the price has fallen. Shorting creates the potential for unlimited losses, but a hedging strategy can protect you. Some investors buy a corresponding call when entering a short position. Traders buy puts and sell calls during bear markets which rely on short-term price movements.
Bull Market
Investors take more risks and appreciate growth investors. These investors may purchase growth stocks that produce attractive top-line growth but zero profitability. Investors can accept short-term unprofitability for long-term gains. They look for companies on the path to profitability and have more patience.
Bullish investors often stay away from value stocks which often lag their growth peers. Investors in a bull market don’t value cash as much and will deploy it into investments as often as possible. Traders may buy call options and sell puts during bullish markets.
Let Professionals Capitalize on Bear and Bull Markets for You
Every bear and bull market provides opportunities for investors. You can trade price movements and hold onto long-term assets. However, it takes a lot of time to stay in the loop on the latest news. You’ll have to read economic reports, get the key takeaways from Fed meetings, and monitor individual assets. All of this work can distract you from growing your career and making more money.
