If you’re jumping off into the world of investing, you’ll probably come across references to a bull or bear market. These animal-themed terms describe different sets of economic conditions.
Here’s a closer look at the differences between bull vs. bear market, and how you can use this information to make sounder investment decisions.
What is a bull market?
When the market is rising and there’s a general feeling of optimism amongst investors, it’s called a bull market. The go-to definition of bull market is a market rise of at least 20% sustained for at least two months. There’s a sustained increase in company shares and a sense that this will continue over the long term.
What is a bear market?
A bear market describes the opposite scenario, where the market drops at least 20% over two months. Company shares decline in value and investors feel pessimistic about making new purchases as a result. When the bear market is bad enough, it becomes a recession or depression.
Indicators of a bull vs. bear market
While no one can fully predict the future, you can tell which way the wind is blowing by looking at a few financial indicators.
One of the fastest ways to figure out if you’re in a bull market or bear market is by looking at the current stock market prices. You must look at the stock market as a whole, rather than an individual stock. If they’re rising overall, this indicates confidence in the market with investors willing to purchase new shares. This means you’re headed to a bull market. On the other hand, when stock prices drop, this indicates that a bear market may be incoming.
Gross domestic product (GDP)
Aggregate demand or GDP can be used to work out whether it’s a bull or bear market. When GDP figures are rising, this indicates that the economy is growing because consumers are spending. A rise in GDP means that a bull market is on the way. By contrast, when the GDP is falling, a bear market may be on the way.
Another economic indicator to keep an eye on is the unemployment rate. When people are employed, they’re able to increase spending and boost the economy. This leads to a bull market based on business growth and consumer confidence. High unemployment rates would indicate the opposite trend – reduced spending as consumers tighten their belts until they find work. This means a long bear market, because it takes some time to get consumers feeling confident in the economy again after a spell of unemployment.
Bull market vs. bear market for investors
As an investor, you should always look at the wider market conditions before making any decisions. Whether it’s a bull market vs. bear market could impact your strategy, although there are benefits to investing in both.
Investing in a bull market
If the market is bullish, the best thing to do is recognise the trend and buy stocks early. You can then sell your shares when the market hits its peak. You should look at long-term investment strategies in a bull market as any losses will be short-lived. Stock prices are likely to continue their growth, so you should be looking at investments you can hold onto. Bull markets usually last longer than bear markets. When the economy is in an upswing, find low-risk funds to grow your money over time.
Investing in a bear market
There’s more risk involved with investing in a bear market, but along with this risk comes potential reward. Short-term strategies are more useful when the market is volatile. You can purchase stocks at a lower price point and then sell them when the market recovers. Some investors choose to sell their existing shares at the first signs of a bear market and then buy them back at a lower price. If you choose this path, you can hold onto the shares through the duration of the bear market to profit when it turns bullish again.
The bottom line is that, as with any investment activity, there’s no fully accurate way to predict the future in a bull or bear market. Market trends could be short-lived or long-lasting. A bull market might last a decade, or only a matter of months. Analyse financial indicators or econometrics carefully to take this into account, along with the types of stocks in your portfolio.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.