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Bull vs Bear

Ensuing trends in stock markets – whether they are appreciating or depreciating in value – and what is the investors’ outlook about the market in general

What is Bull vs. Bear?

The term “bull vs. bear” denotes the ensuing trends in stock markets – whether they are appreciating or depreciating in value – and what is the investors’ outlook about the market in general.

 

Bull vs Bear

 

A bull market indicates a sustained increase in price, whereas a bear market denotes sustained periods of downward trending stock prices – typically 20% or more.

One of the most popular stories about the bears and bulls comes from the way the two animals attack their prey. When a bull is attacking something, it will thrust its horns up into the air, whereas a bear will often attack when in fear and will swipe down.

Thus, if the trend is up, it is considered a bull market, and if the trend is down, it is a bear market.

 

Summary

  • The term “bull vs. bear” denotes the ensuing trends in stock markets – whether they are appreciating or depreciating in value – and what is the investors’ outlook about the market in general.
  • Bull markets generally coincide with periods of robust economic growth; investor confidence is on the rise, employment levels are generally high, and the economic production is strong.
  • During the bearish phase, companies begin laying off workers, leading to a rise in unemployment and, consequently, an economic downturn.

 

Market Phases

Bull and bear markets often coincide with the economic cycle, consisting of four phases: expansion, peak, contraction, and trough.

A bull market begins when investors feel that prices will start, then continue to rise; they tend to buy and hold stocks in the hope that they are right. The investors’ belief about stock prices influences the prices themselves in a self-fulfilling prophecy – where investors create market circumstances.

When the bear market begins, the investors’ confidence collapses, and they believe prices will continue to fall, perpetuating a downward spiral. Bear markets tend to be more short-lived than bull markets.

Whether a market is bullish or bearish depends not just on the market’s knee-jerk reaction to a particular event, but how it’s performing over the long term. In other words, small movements represent only a short-term trend or a market correction, and it’s a longer time period that would actually determine the nature of the market.

Bull markets generally coincide with periods of robust economic growth; investor confidence is on the rise, employment levels are generally high, and economic production is strong.

During the bearish phase, companies begin laying off workers, leading to a rise in unemployment and consequently, an economic downturn.

The explosive bull run in the U.S. began at the end of the stagflation era in 1982 and concluded during the 2000 dot-com bust.

During the secular bull market, the S&P 500 rallied 391% and the Dow Jones Industrial Average (DJIA) – a term that denotes a bull market lasting many years – averaged 16.8% annual returns. It was followed by a protracted bear market. From 2000 to 2009, the market struggled and delivered average annual returns of -6.2%.

 

What Makes a Market Bull or Bear?

Several aspects, such as supply and demand, change in economic activities, and investors’ psychology affect the market – whether it goes bull or bear.

 

1. Supply and demand

Bull and bear markets are partly a result of the supply and demand for securities. The bull market is characterized by strong demand and weak supply for securities.

Many investors wish to buy securities while few are willing to sell. As a result, share prices rise. On the contrary, in a bear market, the demand is significantly lower than supply as more people are looking to sell than buy. As a result, share prices drop.

The ideal thing for an investor to do during the bull market is to buy stocks early in the trend, watch them rise in value, and sell them when they reach their peak.

However, in a bear market, when the probability of losses is greater, and there seems to be no end in sight, investors can profit from short-selling, buying inverse ETFs or put options, or turning to safer investments, such as fixed-income securities.

 

2. Changes in economic activities

Another factor that determines whether the market is bull or bear is how the economy changes from time to time. In a bull market, corporate earnings increase, and the economy grows as consumers tend to spend more due to the wealth effect. Trading and IPO activity also increases during the bull run.

On the opposite, in a bear market, consumers tend to set stricter priorities and reduce their spending, leading to lower sales and a fall in business profits. This, in turn, affects the way market values stock and leads to a negative impact on GDP.

 

3. Investors’ psychology

Investors’ psychology and stock market performance are also mutually dependent. In a bull market, the increase in stock market prices boosts investor confidence, which causes investors to put their money in the market in the hope of obtaining a profit.

However, in a bearish phase, the sentiment is negative, and investors begin to move their money out of equities and into fixed-income securities, waiting for a positive move in the stock market.

 

Related Readings

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Bullish and Bearish
  • Stock Option
  • Market Indicator
  • Stagflation

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