“Bull market” and “bear market”—two terms you’ve probably heard tossed around before but might not totally understand. Whether you’re brand new to the world of investing or you’re an experienced investor, it’s smart to review how both market types work.
Next time you hear news anchors debating, “Are we in a bull or a bear market?”—you’ll be able to form your own opinions.
Read on for an overview of bull and bear markets, their key differences, plus some ways to maintain a smart investment strategy in either market.
How Does a Bull Market Work?
The best way to understand how a bull market works is to visualize a bull charging toward its target. The bull is strong. It’s confident. Most importantly it attacks with a forceful, upward thrust of its horns.
Though no one knows for sure, a bull market likely gets its name from this upward motion of a bull’s attack. During a bull market, equity prices are indeed on the rise.
Characteristics of a bull market include:
- Stock prices are climbing.This is typically demonstrated by at least a 20% increase over a two-month or more span, measured by a broad market index like the Dow Jones Industrial Average or the S&P 500.
- Investor confidence is usually high.
- It often coincides with a strong national economy.
It’s easy to see why the term “bull” is used to describe a thriving stock market. On the other hand, a bear market is named after the way a bear attacks its prey as well—with a forceful, downward swing.
A bear market is commonly marked by falling stock prices.
Characteristics of a bear market include:
- Stock prices are declining. A bear market is marked by a 20% or more decrease (over 2+ months) from previous highs. This is also measured by a broad market index like the Dow Jones Industrial Average or the S&P 500.
- Investors often feel panicked and pessimistic.
- Often the general economy of the country (or at least the economic outlook) isn’t good.
Are we in a bull or bear market?
Now that you have a basic understanding of how both bull and bear markets work, you’re probably wondering which type of market we’re in currently.
At the moment, the United States is experiencing a bull market—the longest bull market in U.S. history.
How long will the bull market continue to rise until the bear market takes over? No one knows, but there’s plenty of speculation on both sides. All you can do is try to take advantage of a bull market while it lasts, and remember to build your cash emergency fund.
The only thing you can control about the stock market—your reaction to it.
From an investor’s point of view (that’s you), a bull market can be a dream come true.
However, depending on where you are in your retirement savings journey, a bear market could potentially create new investment opportunities.
If you’re wondering, ‘how could a bear market ever be good for me,’ consider the following scenario. During a bear market, stock prices usually drop. That may include the stocks in your portfolio.
It’s important not to “panic-sell” your portfolio during a market downturn which locks in your losses and may cause you to miss out on the possible market recovery.
In the meantime while stock prices are low, you may be able to purchase new stocks for less, potentially growing the size of your investment portfolio.
Will this move be right for everyone? Even expert investors have tried and failed to time the market over the years and have lost a lot of money in the process. You should ultimately do what you believe is best for you and seek expert advice when it’s warranted.
Of course, it’s normal to feel emotional as you watch the nest egg you so carefully stashed away ebb and flow with the market. Yet acting on those emotions is something you should try to avoid.
Consider an investment plan with a risk level that makes you comfortable. From there, try setting investment goals and contributing to them on a regular basis.