Understanding bull markets and bear markets

Most investors have heard the terms “bull market” and “bear market.” But many don’t know what they mean exactly, or how an investor is supposed to behave during these periods. What does one do in a bull market vs. in a bear market? Does it have anything to do with Chicago sports teams? And why aren’t there dog and cat markets? Perhaps that would help take the edge off any bouts of volatility. “Oh, it’s just the cat market being frisky again!”

Truth be told, the bull vs. bear market concept is rather simple at its core, and the terms are easy to remember once you make some associations.

Bull market means stock prices are going up

A bull market is simply a period of rising stock market prices. Try remembering it by thinking of a bull charging forward and thrusting its head UP. During a bull market, there may be short-term market pullbacks (slow downs or declines) and volatility, but generally the trend is of rising stock prices as the economy grows and investors continue to buy stocks. Bull markets can last for years. The current bull market (since 2009), and the bull market of the 1990s are each around a decade long.

Bear market means stock prices are going down

Bear markets, in contrast, are markets in which stock prices are falling, and investors are selling. An easy way to remember this is by thinking about how a bear would attack -- it would stand on its hind legs and swipe DOWN at its victim. Kind of like the swipe of a bear claw (I imagine), bear markets usually occur swiftly and without much warning. While they can last for years, most are typically much shorter. For instance, the bear market of 2008 (an extreme example of bear markets) was sudden and deep, with the market declining almost 50% during the middle of the year, but the market began to recover as early 2009 and surpassed its prior peaks by 2013.

Bulls and bears by the numbers

In the chart below, you can see the longer bull markets and shorter bear markets over the last 50 years. (The vertical/left axis shows the value of the S&P 500.) As you can see by the pattern, the current bull market may be due for a bear break in the near future.

Chart: The S&P 500 stock market index through bull and bear markets over the past 50 years

Source: Source: Clearnomics, Standard & Poor's

Should I invest more in bull markets?

For many investors, it may seem that investing during bull markets and avoiding bear markets is ideal. However, it’s not quite that simple. First, it’s very difficult to know when bull and bear markets will occur. Even many extremely sophisticated investors have either missed bear markets, or worse – not stayed invested during bull markets. This is why, for most long-term investors, staying invested through all markets is usually the best course of action.

“Buy low, sell high” applies to bulls and bears

Many investors think that bear markets are when you should stay away from investing. To them, the world feels highly uncertain during these periods, and they think that nothing is safer than selling their stocks and holding cash. In reality, while bear markets can be scary, they’re also when the stock market is the cheapest. Few other investors are willing to invest during bear markets, and, therefore, many may be selling their investments, even as prices fall. History has shown that bear markets are often the best times to invest – rather than jump ship -- because there are many opportunities to “buy low.”

Ultimately, bull markets can be good times for investors, especially if the economy continues to do well and corporations continue to grow their profits. However, many investors think that bull markets are a better time to invest, and they consequently invest more and more, even as the stock market becomes more expensive and the bull market enters its later stages. Instead, it’s during these aging bull markets that it may be prudent to add more stable investments, such as fixed income and other bonds, to balance out your stock portfolio.

Be ready for bulls and bears with a balanced portfolio

With today’s bull market now over a decade old, it’s practically inevitable that there will eventually be a bear market. However, rather than trying to “time the market” by predicting when the next recession or bear market will occur, it has historically made more sense to hold a balanced portfolio that can help withstand market bumps. Investors who can focus on long-term trends and stay invested through both bear and bull markets are usually in a better position to achieve their long-term financial goals.