Business television networks are packed with talking heads who toss around terms like “bulls” and “bears.” But stock exchanges are about money, not large mammals, so learn how investors define a bull or a bear market.
Bull Market: Good Times, Good Mood
Bull markets are defined by rising stock prices and good economic times. But stock prices alone don’t tell the whole story: investor sentiment is part of the definition of both bull and bear markets.
When someone is “bullish,” they are optimistic about general economic conditions. Employment is up and businesses are growing.
Someone might be “bullish” about a company or sector, meaning they believe the company and those like it will do well, and earnings and stock prices will rise.
Bull markets that seem out of sync with current conditions are based on future expectations that things will get a lot better; for example, bulls may believe that a safe and effective vaccine for COVID-19 will be developed soon, and economic activity will recover thereafter.
Bull markets in stocks create ripple effects in other types of investments, like real estate. People “feel” rich and can get in over their heads.
Overenthusiasm and downright greed push investments up beyond their rational value. “Retail” or individual investors pour in, buying stocks indiscriminately.
These markets have often ended dramatically, in crashes that impact all sectors of the economy. The great recession of 2007-2008 resulted from overextension in real estate investment products during a “housing bubble.”
Major investment firms failed or nearly did, and homeowners were left holding the bag, having bought homes they couldn’t truly afford.
Bear Market: Bad Times, Pessimistic Outlook
A bear market is the opposite of a bull market. Economic conditions have turned sour, unemployment is up, and companies aren’t making as much money as they did before.
Investors say that stocks have entered a “bear” market when markets drop 20 percent from their highs. The economy slows, and investors get nervous, selling their stocks as prices decline, suffering losses.
These losses sour investors on the market, and they may flee to extremely “defensive” investments like gold or to companies that provide necessities, like food, health care, and electricity.
Pundits will say that it’s impossible to predict a market “bottom,” but that doesn’t stop investment gurus from trying. “Technical” analysts look for patterns in stock charts, while others search for signs of early recovery, like increases in transportation stocks indicating a boost in shipments or changes in financial policy intended to spur economic activity, like lower interest rates.
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What’s in a Name?
The terms “bull” and “bear” are said to have originated from how those animals fight—a bull tosses its head up, while a bear swipes it paw down.
The most important thing to remember about how investors define bull and bear markets is that time tends to even things out. Over the long term, despite periodic major declines, stocks have performed well. Do your homework and consult a licensed, professional financial advisor before making decisions about how to invest.
Image Credit: bull or bear market by twenty20.com
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