Bear and bull markets describe large-scale market movements. Bear markets refer to tradeable security prices undergoing a sustained drop. A bull market refers to security prices rising more or less steadily for a significant amount of time. Note that for a variety of mathematical and psychological reasons, bear and bull markets are not mirror images of each other. Here, we will go over the definitions, contrasts, risks, and benefits of bear vs bull market.
What Is a Bull Market
A bull market is a prolonged and general rise in prices of a publicly traded security. Within a bull market, downturns can occur but they are not prolonged or significant over a timescale of over about a year or two. A bull market in one commodity may not necessarily correspond to a bull market in a related commodity, though it is possible. Bull markets correspond to economic expansion in most circumstances. Unless inflated by non-market forces like significant government support, that is.
What Is a Bear Market
A bear market is the opposite of a bull market. Bear markets have prolonged, or sometimes swift drops in prices. As with bull markets, there may be “contrarian” price moves. In the context of a bear market, they would be price spikes or bumps. As bull markets “top out” at a price maximum, bear markets “bottom out” at prices that are often irrationally low for the value of the security.
What is the Difference Between Bull and Bear Markets?
Thinking of a bear vs bull market, it is important to recognize differences aside from “flipping a positive sign into a negative.” Bull and bear markets are not perfect mirror images of each other.
A bull market is characterized by a policy that typically takes advantage of the “rising tide.” It seeks to control inflation as business profits and prices rise. Bull markets typically see incremental interest rate increases. Savers and fixed-income investors that want to purchase CDs and bonds would be wise to accumulate money. They should not invest in a CD or Treasury until a late bull market when interest rates are relatively high. Those who do not recognize or respect the bear vs bull market dynamic are often doomed to buy into suboptimal investments.
They should not invest in a CD or Treasury until a late bull market when interest rates are relatively high. Those who do not recognize or respect the bear vs bull market dynamic are often doomed to buy into suboptimal investments.
On the flip side of a bear vs bull market evaluation, bear markets are more volatile and panicky decision-wise. Typically, this is the goal in a bear market context. To alleviate unemployment and similar headline-grabbing issues like bankruptcies or falling property values. They use vigorous intervention in the markets. “Stimulus” and “assistance” become popular policy choices.
Typically a disagreement rises up during a bear market. There are some advocating cutting taxes and restrictions on struggling businesses versus assisting consumers and economically disadvantaged populations. The legislative and regulatory dynamics of a bear vs bull market are marked by differences in urgency, public response, and choice of political philosophy invoked as justification.
Which One is Best For You?
Don’t imagine that a bear vs bull market situation might equally benefit different sectors of society to the same extent. In fact, with few exceptions, a bull market is better from many perspectives.
A stock bull market has the following.
- lower unemployment
- higher investment portfolio values
- optimism about the economy
- significant rise in wages.Equity bear markets share the following.
- haphazard responses to recessionary pressures
- panicked selling by amateur or financially squeezed investors. This generally hurts more than helps.
Of course, some bear markets are beneficial to the average person. For instance, a bear market in oil prices results in layoffs in bankruptcies in the petroleum industry. However, the much wider benefit of lower gas prices results in many people praising low oil prices. Also, watching with some trepidation when oil and gas bounce from a bear and into a bull market.
Likewise, a bear market in precious metals, debt, currencies or real estate is best for an astute and patient buyer. However, it can be gut-wrenching for an anxious seller.
To generalize, a bull market is the fruit or reward of opportunity. A bear market is a slide towards a favorable buying price in order to jump into an opportune position.
One could argue that an exception might be something like a bear market in labor participation. This means higher unemployment. This situation is negative virtually across all sections of society. However, a “market” refers to tradeable securities, not an index or measure of general well-being. Such things as unemployment rates or lifestyle satisfaction measures are reflections of bull and bear markets of various tradeable securities. Still, they are not among them.
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One last point regarding an important profitability ceiling of bear vs bull markets. Securities in a bull market, such as a stock market run-up, can result in capital gains well in excess of one hundred percent.
A stock bought for 20 dollars per share and sold for 200 or more dollars per share is well within the realm of possibility. It results in 900+ percent capital gain. Thus, it is said that bull markets don’t have a defined profitability ceiling. Of course, no equity will trade “to infinity.” The practical result of this lack of ceiling is that a direct equity stake in a bull market results in a risk of at most 100 percent of invested dollars. However, there is a possible gain of over 100 or even 1,000 percent.
Contrast that risk/reward profile with the possibilities in a bear market. A direct, un-leveraged trade on a security’s decline is reasonable during a market drop, but the minimum price of a security is 0.00 dollars. This means that the maximum possible profit from a short sale is 100 percent. Using the above example, a drop of 200 dollars per share results to zero results in 100 percent gain, as does a drop from 20 dollars per share or 2 cents per share. A given short-sell trade will turn profitable in a bear market, but with a well-defined profitability ceiling of 100 percent capital gains. However, the risks of short-selling are that price increases, which are harmful to a short-seller, can increase far past 100 percent per the logic and example of the “bull market” explanation above.
Given that fact, generally speaking, going short in a bear market is far riskier than going long in a bull market.
A bear vs bull market analysis has to take into account, at the very least, the above variables. Other considerations could include the details of interest rate moves, government interference in the market, socio-political instability during bear markets, and cultural factors that affect how people perceive prosperity, hardship, free enterprise, economic inequality, and poverty.