Investing Fundamentals

Bull Vs. Bear: What To Do During Market Upturns and Downturns

Last Updated on January 27, 2019 Last Updated on January 27, 2019
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Questioning what the [email protected]# bulls and bears have to do with the stock market? I’ve been there before. It’s a fair question. It’s damned difficult figuring out all the Wall Street jargon. Average cumulative losses. Economic cycles. Market corrections. Bulls and bears pitted against each other in a gruesome battle to the death. Mass hysteria!

Fear not!

We’re going to take a look at bull vs. bear markets, their history, and examples of each and how you should respond to both.

What’s a Bull Market

Being in a bull market is like when you were a kid, summer break just started, and your dad would take you to 7-11 to buy you a cherry-flavored Slurpee and a pack of baseball cards…it’s good. Bull markets are good.

Let me explain. In a bull market:

  • The stock market is up
  • Employment is climbing
  • Investor confidence is high

In an average bull market, market prices rise by 20% with the expectation of high returns. It’s tough to predict, and unless you’re Ray Dalio, won’t realize it until after it happens. That’s why you should never try to time the market.

“A bull market is the condition of a financial market of a group of securities in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market but can be applied to anything that is traded, such as bonds, real estate, currencies, and commodities.” – Investopedia

All asset classes are affected in a bull market. It’s common to see prices rise. Banks will encourage more lending and interest rates are lower. There’s a stronger willingness to buy.

Speculation plays a hand too. It fuels the bull. Why?

Because investor confidence is high, more and more people start thinking rising market indexes will continue. It has a domino effect with more money being thrown into Wall Street.

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The average bull market period lasts nine years with an average cumulative return totaling over 470%.

What’s a Bear Market

The opposite of a bull market is a bear market.

In a nutshell:

  • The stock market is down
  • Unemployment is rising
  • Investor confidence is low

Widespread pessimism fuels a bear market. Those who were once eager to buy stocks now want to sell them to avoid a loss aka short-term trading. Bear markets usually mean there’s a recession coming.

Bear markets show signs there’s an overvaluation (or bubbles) of asset classes like stocks and bonds, a decline in business cycles, and the gross domestic product (GDP) is low.

The Federal Reserve tends to tighten its purse strings coupled with rising inflation.

When share prices drop, it negatively affects market sentiment. Those previous investors who couldn’t wait to get their hands on that Wall Street money are now avoiding it like the way you avoid that condescending dick at work who can’t stop talking about his latest app that just got funded. Shut the [email protected]# up.

Now that businesses are recording losses, stocks aren’t viewed with nearly as much optimism. Speculation is on a downward trend resulting in the devaluation of share prices. All that shit that was once cool ain’t as cool as it used to be.

It feels like bear markets will last forever - kind of like those embarrassing high school moments - but they don’t.

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Remember…

The average bear market lasts 14 months with an average cumulative loss of -41%.

One of the most highly-watched indices, the S&P 500, on average, drops 33%.

So, keep calm, stay the course, and repeat after me: “This too, shall pass.”

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Bull and Bear Markets (Where’d the Name Come From?)

The names come from the way these two animals attack. A bear swipes down with its paws to kill its opponent. Bulls lunge their horns up towards its attacker. These actions are used to define the market. A bull market is up while a bear market is down.

Another thing…

Bulls are known to be lively and full of energy while bears lay dormant in hibernation. Investor attitudes reflect this. If you’re a bullish investor, with every purchase you make, you speculate stock prices will go up.

If you’re bearish, you’ve got a bad feeling and are worried about a market decline or a financial crisis (if you’re not already in one).

History of Bull and Bear Markets

There’s a couple of stories that describe how bulls and bears became associated with the stock market. The first has its origins in ancient Rome.

At the height of its power, the Roman Colosseum held violent, life-or-death games as spectator sports the same way we’d watch a football game on TV today. The games matched animals versus animals, people versus animals, and even people versus people. Damn!

It was a common occurrence to see bears and bulls fight each other in the ring. And the association eventually stuck.

The second dates back to the Elizabethan era in England. It stems from an old proverb that goes like this:

“It is not wise to sell the bear’s skin before one has caught the bear.”

This saying was about the buying and selling of bearskins. The sellers or ‘bearskin jobbers’ acted as the broker between the trapper and customer. The customer would pay the broker the current market value for the skin before the broker had received the skin from the trapper.

Here’s the kicker…

If the price dropped, the broker purchased the skin at the lower price and pocketed the difference as a profit. This practice became known as short-selling (sellers who hope for a drop in market price).

Eventually, ‘bearskin’ got shortened to ‘bear.’ It’s how the word bear became associated with declines in the market.

You’re selling stuff that’s not in your possession. It’s like when your friend gives you money to buy a gram of pot. You and your friend both know that a gram of marijuana costs $15.

However, when you get to the dispensary, there’s a sale. Grams are only $10! So, you buy the gram for $10, pocket the $5 and tell your friend you paid $15 for it. People, please don’t treat your friends this way!

Now you can dazzle people with this knowledge at cocktail parties.

Bear Market Examples

When there’s a 20% drop in price – that’s a bear market. It could be the NASDAQ (tech-heavy), Dow Jones Industrial Average or DJIA (probably the most-watched stock index on earth), or the S&P 500 (strong indicator of how U.S. economy is doing) – anything.

Notable bear markets:

  • Great Depression of 1929
  • Dotcom bubble burst of 2000
  • Housing crash/financial crisis of 2007/2008

Bull Market Examples

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A 20% increase in the market from its most recent lowest point indicates a bull market. Same rules apply.

Notable bull markets:

  • Post-WWII 1945
  • The Early 1980s – 2000
  • 2009 to 2019 (at the time of writing this article, January 2019, there’s a market correction )

*A correction is when there’s a 10% drop from the most recent high in the market – these usually last five months or less. Since 1945, the S&P 500 has had 22 corrections.

“Corrections are just a routine part of owning stocks. Instead of living in fear of corrections, accept them as regular occurrences. Historically, the average correction has sent the market down 13.5% and lasted 54 days – less than two months.” – Tony Robbins

Final Thoughts

I won’t tell you what to do with your money. I’m no advisor. But I will tell you the way I view both bull and bear markets.

Bear markets…

I like to look at them as a sale. Recall our pot purchasing friend from earlier?

When something is on sale, you’re getting it at a reduced cost. If toilet paper or bread is on sale, I’ll buy more at the lower price. Why?

Because it’s a deal! I prefer to buy stocks when they’re on sale. When there’s a correction or a bear market and prices are down is when you get the most bang for your buck.

Bull markets…

This quote from Warren Buffett nails it:

“Be fearful when others are greedy and greedy when others are fearful.”

The stock market has a Darwinian element to it. It’s constantly evolving. Weak companies who don’t hold their own get replaced by ones who do. The market always goes up. It’s survival of the fittest. There’s a yin/yang relationship between bull and bear markets. One can’t exist without the other.

Food for thought:

Not one company on the original DJIA is represented on that index today. Shifting economies and technological advancements lead to the creation of new businesses. Ones that are no longer relevant get replaced by ones that are.

And now you know the difference between bull and bear markets! Pat yourself on the back!

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