What is the Difference Between a Bear and a Bull Market?

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If you’ve had any exposure to the stock market, even just in the last month or so, I’m sure you’ve heard the terms bear or bull market. Both are unavoidable as an investor, and in the simplest of terms they are the two opposing ends of the investment cycle. 

Despite our recent downturn in our economy, both bear and bull markets provide ample investment opportunities. If you know how to maneuver the market, that is! 

Bull goes up, bear goes down

This is the simplest way to begin understanding these concepts. Markets fluctuate. They’re bound to have highs and lows. A bull market is one that’s on a steady rise, whereas in a bear market, prices are continuously dropping. 

In the stock market, a “bull” investor is one that buys more stocks because they believe their value will continue to rise and they will be able to sell them for more later on. A “bear” investor would be selling their stocks because they believe their prices are dropping and they want to get some decent returns before prices get lower. 

Bull and bear market are terms often used to describe securities, like stocks and bonds. But they can be applied to any market, like the real estate market for example. Note that neither of these terms can be applied to consumer prices! When these rise it’s inflation, and when they fall it’s deflation

What’s a bull market?

If a market is labeled as a bull market, it means there’s optimism for the future. Prices have been rising consistently and are expected to continue rising. At the height of a bull market, prices will rise far beyond the actual value. 
A bull market tends to last a lot longer than a bear market, which is good news for your returns! The longest bull market in Canadian history is the one we just came out of, which was a decade-long rise starting after the financial crisis in 2008-09. In Canada, bull markets between 1956 and 2008 have a large range of 5-90 months.

The better the economy, the higher the chance of a bull market

The switch to a bull market can be caused by a number of economical and social factors, some we see coming and some that take us by surprise. But on the most basic level, a healthy economy is the main cause of a bull market. 
The top-line revenue and the amount of profit it makes for the company are numbers that help define whether or not we are in a bear or a bull market. They are also numbers that rise as the economy does. The higher the top-line and profit, the more likely we’re in a bull market. 
The P/E ratio (price-earnings ratio) is a main indicator on whether the stock market is a bear or a bull market. It represents how much in additional stock price an investor is willing to spend for each dollar of earning. In other words, how much are people buying stocks for compared to how much they’re actually worth? 
Before our recent economy crash, we were seeing P/E ratios in the multiples of hundreds. These will fall as a market enters its bear phase. 

Fluctuations are expected

A bull market can include a stock market correction, which is when stocks drop by 10% or more over a period of weeks or months, without entering a bear market. The market will remain on an upwards trajectory after the correction.

Even a stock market crash can happen within a bear market! The difference here is that stocks drop by 10% or more within a day or two, making it much more sudden than a correction. Although this is more likely to be a sign of an upcoming bear market than a correction, it isn’t certain. The market can still recover and proceed upward.

What’s a bear market?

The logistics when it comes to a bear market is ever so slightly more complicated. But since it has the capacity to wipe out years of earnings, it’s important to understand the ins and outs. 

A market becomes a bear market if it drops by 20% or more within two months. In stocks, defining whether a market is a bull or a bear market is usually based on an index, like Dow Jones Industrial Average or the S&P 500. 

Usually a bear market lasts around 18 months. In Canada, bear cycles between 1956 and 2008 have ranged from 3-23 months. Obviously, the most notable bear market in history is the Great Depression, which lasted from 1930-1941.  One that more of us will remember, though, is the market during the Canadian recession of 2008-09

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A bear market is accompanied by a recession, which will lead to unemployment rates and an increase of Canadians without money to spare. The longer a bear market lasts, the more negative impacts the economy will see because of it.

What causes a bear market?

There is really one main thing that affects the likelihood of a bear market: investor, business, and consumer confidence

The lower the confidence in a market’s rising value, the lower the demand in that market. 

Sometimes a bear market is caused by things that we can predict. However, some factors are completely unpredictable. The sudden global coronavirus pandemic cause a stock market crash in March of this year, which is something very few people could have expected. Coronavirus caused an interruption of supply chains and impacted the global workforce, which greatly contributed to the stock market crashing the way it did. 

Often stock corrections, or a stock crash like we saw in March, leads to the loss of confidence. This is considered the tipping point of the cycle, because suddenly everything is impacted by uncertainty. “Bears,” or investors who have lost confidence in their investments, will begin to sell as they expect the prices to plummet. 

Like the domino effect, the crashing prices in turn lead to a bear market. 

Are we in a bear or bull market?

What we know is that March 2020 saw a pretty intense stock market crash because of the COVID-19 pandemic.  Since we know stock market crashes could cause a bear market, it seems coronavirus was the final push needed to kill our 10-year-running bull market.

In March of this year, both Dow Jones Industrial Average and S&P 500 officially hit a decrease of 20%. This means stocks are technically now a bear market. In fact, this is the fastest 20% plunge on record.

If the patterns continue, other markets are bound to follow suit. Oil prices recently tanked to the lowest they’ve been in two decades, which is another sign we’ve tipped into a bear market. 

The fact of the matter is we’ve tumbled into a bear market, and probably a really bad one, at that. 

How to invest no matter the market

So, we’re experiencing a bear market. But despite falling prices, this doesn’t mean that you should stop investing!

A bear market isn’t something you can conveniently avoid as an investor. They happen naturally! All you can do is work on your ability to emotionally handle a volatile market

Stay consistent

The rises and falls of the stock market are stressful, but if you’re investing smartly, this volatility could be used to increase your returns over time. 

You’ll want to be prepared with a balanced stock portfolio, and stick to a consistent contribution plan throughout both bear and bull markets if you’re able. 

The “peak” right before buyers lose confidence is the ideal time to sell, obviously. But it’s also an impossible thing to predict. Trust me! Many people have tried! 

Don’t try to time the market, because you’re more likely to be wrong than right. It’s best not to play with fate and stay consistent. Especially when watching prices fall make you nervous.

Decrease the risk in your portfolio

If you’re in the midst of a bear market, are nervous about falling prices, but still want to invest (you should!), the best option is to lower your risk so that you can minimize your losses without withdrawing funds. 

Switch to a robo-advisor, like Wealthsimple, especially if it’s the uncertainty that is a problem for you. This way you and your stocks can have an “out of sight, out of mind” type of relationship, and you won’t have to watch your losses! 

Now is the perfect time to start investing!

If you haven’t started investing, now’s a good time. Prices are low, which means it’s cheaper to buy! The only thing we know for sure is that the market will be a bull market again at some point. These prices will rise. If you aren’t too harshly affected by the pandemic, and have some money to spare, invest it!

Unsure how to start? Open a Wealthsimple account and begin making regular contributions. Using a robo-advisor will allow you to take advantage of low prices without needing to immerse yourself in the chaos! 

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It’s impossible to buy and sell and the perfect time. It’s likely prices will continue to fall for a while, but we can’t know how long. Just keep in mind: we will reach another bull market! 

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  • I always associate market corrections and bear markets as a “Boxing Day Sale” or a “Black Friday Sale”, because long term investors can scoop up Index ETFs at a 10-30% discount. There is nothing to fear but to take advantage of the opportunity.

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