Bear vs. bull market: A guide to key differences
Editorial staff, J.P. Morgan Wealth Management
- A bull market indicates that asset prices have risen significantly.
- A bear market indicates that asset prices have dropped significantly.
- Although bull and bear markets tend to reference the stock market, these terms can be applied to markets of different types of assets, including real estate and cryptocurrency.
As you wade into the world of investing, you’ll likely hear the terms bear market and bull market thrown around. Each term is used to describe different points in the market cycle. For investors, these key phrases offer a quick way to discern what’s happening with the market, and if the market is on an upswing or a downswing.
What is a bull market?
A bull market means that asset prices have risen significantly over an extended period of time. In relation to the stock market, a bull market generally involves a 20% or more increase in stock prices from recent lows.
Typically, a bull market is associated with high investor confidence. Bull markets tend to last longer than bear markets, with the median bull market lasting 46 months.
There have been many bull markets in recent history in the U.S. The longest bull market lasted from roughly 2009 to 2020, an 11-year period. During that time frame, the stock market’s total return was 528%.
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What is a bear market?
In contrast to a bull market, bear markets involve falling asset prices over an extended period of time. When speaking of the stock market in particular, a bear market is defined as a prolonged period of declining stock prices, typically characterized by a drop of 20% or more from recent highs.
While there’s no universally required duration for a decline to be considered a bear market, a bear market is typically recognized when the 20% decline persists for at least two months, distinguishing it from shorter-term corrections or temporary market fluctuations.
It’s important to note that falling prices over any period of time might lead some financial analysts, economists or others to mention the term “bear market,” but bear markets have a few particular characteristics that go beyond just a decline in the stock market.
Beyond the stock market impact, bear markets tend to come along with slowing economic conditions and low investor confidence.
There have been roughly 14 bear markets since 1942 in the U.S. stock market. The average length of a bear market since 1942 has been 16.79 months, with a mean cumulative loss of 48.2%.
How to tell if it’s a bull or bear market
Although you have the definition of bear versus bull markets, it can be helpful to understand the key differences between these divergent market conditions. The indicators below can help you determine what phase of the market cycle is happening now:
Bull market indicators
The following indicators can be useful in identifying bull markets:
- Growing economy: A healthy economy exhibiting growth often goes hand in hand with a bull market. This might involve indicators like a low unemployment rate and high consumer spending.
- Growing corporate earnings: Growing corporate earnings are a fundamental driver of bull markets, as they directly support higher stock valuations.
- Rising asset prices: Rising asset prices – including the prices of stocks but also of real estate and commodities – due to higher demand may indicate a bullish market.
- High economic confidence: When people are more confident about the economy, many investors get more serious about investing. Consumer spending and other factors may indicate that people are confident about the economy.
- Increasing dividend payouts: As stock prices rise, some companies choose to increase the dividends paid to shareholders. It’s important to note that dividends are paid in both bull and bear markets, though, so this is just a single indicator to be mindful of.
Bear market indicators
The following indicators can be useful in identifying bear markets:
- Weak corporate earnings: If normally profitable companies are showing weaker earnings, it may be a sign of larger problems with the market, especially if companies are taking on increasing amounts of debt at the same time.
- Slowing economy: An economy with problems may not grow quickly, or it could even shrink, which usually sets the stage for a bear market.
- Falling asset prices: Lower stock prices over a sustained period are a hallmark feature of a bear market.
- Low investor confidence: When investors are bearish about the economy, many have low confidence in the market.
Is it better to invest in a bull or bear market?
The market goes through cycles, including periods of bear and bull markets.
Speaking about bull markets in particular, Angelena Mascilli, the Head of J.P. Morgan Wealth Management Banking, says, “When you’re thinking about the latest device or hottest travel destination, fear of missing out – or FOMO – may seem like an overreaction. But in a bull market, FOMO is a legitimate concern.”
Waiting for the bull market can be tempting because everything seems to be going well. But choosing to invest only in bullish markets can be a mistake over the long term because you may miss out on the chance to buy when prices are lower.
One way to avoid trying to time the market is to make regular periodic investments over the long term, which means you’ll end up investing during both bear and bull markets over your investing career. This strategy is known as dollar cost averaging, which involves investing equal amounts at regular intervals regardless of market conditions. This can help you get started because you’re only deciding what to buy not when.
For example, committing to invest $100 per month from now until retirement represents a dollar cost averaging strategy.
Jacob Manoukian, J.P. Morgan Private Bank and Wealth Management’s U.S. Head of Investment Strategy, puts it like this when thinking about investing in a bear market: “History suggests that the longer the time horizon, the narrower the range of potential outcomes. This is one of the many reasons why we believe that designing an investment portfolio with a clear intent and time horizon is the best way to increase the probability of investment success. Lower valuations just might make it feel a little bit better to get started now.”
Investing in a bull market
During a bull market, consider the following investment strategies:
- Keep long-term goals in mind: Although it’s tempting to jump on the hot stocks during a bull market, do your best to stick to your long-term investment plan. For example, if you’re saving for a future retirement, a long-term strategy might work best.
- Pay attention to growth areas: As the economy grows, new areas may make a splash. Adding growth stocks to your diversified portfolio may help lead to gains in periods of stock market growth.
- Don’t keep too much in cash: It may make sense to consider investing where you can so you aren’t sitting on the sidelines during periods of economic growth.
Investing in a bear market
Although a bear market is a normal part of the market cycle, it can feel like a scary time to invest. You may want to use some of the strategies below during a bear market:
- Don’t panic: Many investors panic sell during bear markets, which can devastate their finances over the long term. Do your best to avoid selling out of fear during a downturn. Bear markets have historically been shorter periods than bull markets.
- Continue investing according to your plan: If you planned to invest a set amount every month, don’t skip out on this commitment. Over time, the stock market’s trendline has only gone up.
- If you’re a long way to retirement and can afford it, consider buying the dip: Particularly if you are a long way from retirement and can afford to, consider buying the dip. What does buying the dip mean? In investing it means purchasing assets (like stocks) during periods when the price has fallen, anticipating that the price will rebound. Historically, asset prices have recovered following a bear market, and bear markets are a period to take advantage of assets on sale. Buying the dip may be particularly advantageous if you are investing for the long-term and have time to see your assets recover. If you’re nearing retirement this may be a more challenging strategy given you won’t have a long of a runway to see asset prices recover.
The bottom line
As you navigate investing through different market conditions, working with a trusted financial advisor can help you make the best decisions for your situation.
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Editorial staff, J.P. Morgan Wealth Management
