What is the difference between bullish and bearish markets?
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As an investor, the first thing to be aware of is the holy stock market lifecycle.
This simple knowledge will save you from waking up one morning seeing half of your stock in red color and pulling your hair out calling your financial advisor. Financial cycles are important, and you need to always keep in mind your main goals as an investor.
So, let’s turn to the US Security and Exchange Commission and their bull and bear market definition.
Bull market: A time when stock prices are going up, and everyone looks optimistic to market growth. Generally, a bull market occurs when there is a rise of 20% or more in a broad market index over at least a two-month period.
Bear market: A time when stock prices are going down, and sentiment on the market is pessimistic. Generally, a bear market occurs when a broad market index falls by 20% or more over at least a two-month period.
How do you know if it’s a bear or bull market?
If you see the major indexes growing for several months or more - this is considered a bullish market vs a bearish one - where you see a decline in indexes.
A bull market is a time of long-term investments, in the situation of a growing economy when there is no need to stress that much. However, it’s time to build a diversified portfolio that will remain stable even in bear market times. If your goal is long-term, for example, you’re investing decades ahead to provide yourself with a proper retirement allowance, you must consider that your portfolio will probably go through all the stages of the economic cycle, and it should not scare you. Each period has opportunities for investors.
To sum up, the bull market is growing and roaring while the bear market is slow and stagnating. Typically, the bear market times are tightly connected to a state of recession such as the 2008 crisis, for example. It’s unlikely that you miss out on information about the start of the new bear market lifecycle.
Bull vs Bear market: a closer look
First, it is important to identify which part of the economic cycle we are in. A smart investor knows better than believing panic in news. We look at the numbers when defining bullish vs bearish market. These are the three main ratios that help us to analyze the economic cycle:
▶️GDP. You probably know what GDP is. Real Gross Domestic product is one of the indicators that affect the market. Rising GDP means that the economy is growing: more products, more jobs, and much more money spent. Bull market = growing GDP, people buy and sell goods and services, new companies open due to the increased demand. Falling GDP is a sign of a decrease in consumer purchasing power. Less money is spent, the market doesn’t grow, and it means that we’re headed for a bear market.
▶️Unemployment rates. This factor is one of the metrics that investors may miss in the analysis. if the business doesn’t grow, there is a decline in the number of workplaces (bearish market alert), if there are enough opportunities in the growing market—more people are needed to make it work which is a sign of a bullish market.
▶️ CPI. The Consumer Price Index is one of the indicators of the bear and bull market period: the ratio shows the change in price for a group of goods that consumer buys. This ratio shows the inflation best and if you see these numbers growing it is a sure sign of upcoming bear times. This index is frequently criticized by the economists but as an investor you do not need the exact percentage or perfectly counted ratio: the dynamic is the most important part. Altogether with other ratios mentioned further in the article, it may give you the full picture of bear versus bull market situation and the position of the particular company.
Now, it seems to be clear: when we’re in the time of a bull market—we sell, we buy, and we invest.
The thing is, when is the bull market and what do we do in times when we know that a bear market is around the corner?
Where are we now? Bulls vs Bears in a time perspective
The pandemic and the economic war between China and the US, one more Middle Eastern political collapse, and many factors that may influence the current situation. However, we’re still in a bull market when we can watch the fast growth of the companies revenues.
From this graph, you may see that the longest bear period was 31 months, which is 2.5 years and the pandemic caused only 1 month of a bearish market. It is not long enough to panic but it is long enough to reconsider your strategy and use this time wisely.
Currently, we are one step away from the stagflation period, which is characterized by slow growth of the economy in combination with inflation. It’s got bearish tendencies and that’s why some bear market investment strategies will work for you now.
One of the main outcomes: do not wait for extremes, watch the tendencies and change your bulls and bears trading strategies wisely.
Is it better to buy in a bear market vs bull market?
In both. Your investing strategy may differ as well as your behavior in bear vs bull market, but it does not mean you should stop buying and selling and quit the idea of investing. Each stage of the cycle has its own advantages as well as each company may have its unique way in the given period.
✅ Advice for all times: have a plan and stick to your goals but be open to new opportunities.
The stock market is not a place for compulsive buying. If you know your goals and you’ve got a plan, parts of the economic cycle will become your friends, not enemies. Reading bull vs bear meaning is not enough to take measures to protect your portfolio, so let's get to practical advices.
▶️A bearish market is a time of reliable and stable tools like certificates of deposits, treasury bills, even real estate, because your first goal is to save. A bearish investor is a cautious investor. Not a scared one though.
Gold is not always a piece of good investment advice, but in a bear market, we say yes to commodities and gold.
From a long-term perspective, it is a high time to buy underpriced shares of companies that are suffering from the bearish times but will soon recover. Remember, that even stocks of companies with great performance may fall, the decline may be used as a good entry point. Make sure your portfolio is diversified enough and has all the stable tools, which will allow you to get some of the volatile shares.
For example, during the pandemic, all the airlines suffered without business. The share prices dropped because nobody knew how long the situation would last. Optimistic bear investors used this moment to buy some underpriced stocks at that moment. However, the interesting thing is that what was a bear run for some companies, especially transport and tourism, was a bull run for IT and AI companies such as Zoom or Amazon that significantly grew over the pandemic times.
Do not panic sell during the bear period, especially in the beginning. Think twice: analyze the company numbers and think whether you may regret selling this share after it recovers.
▶️ A bullish market is a time of shares and even crypto. It’s the time when we expect growth, and we aim for it. It’s the time of more demand than supply.
- It’s a time when after some analysis it’s smart to invest in young companies that are predicted to grow. However, you shouldn’t rush into this expecting a boost to your portfolio. During a bullish market, the growth is fast and some failures follow shortly.
- It’s easier to try different strategies and short-term investments. Taking profit from ups and downs, regular intervals will help to find the best entering and selling points.
- Time to diversify your portfolio combining young and well-performing companies, shares, and exchange-traded funds. Growth is important but do not forget about the stability that we appreciate during the bear times. How to diversify your portfolio in a smart way? Do not skip this article.
Learn how to diversify your portfolio geographically, according to sectors, and make it safe for upcoming bearish times.
▶️ Gainy is here to help you to be prepared for all the periods. We analyze your portfolio and adapt it to your goals and help you to reach them. We know that smart solutions will help to overcome even severe times and will remain stable and profitable. One of them you have just read and we hope you got the idea what is bull market and bear market.
How do I know that this company is worth investing in during the bull market vs bear period?
Times of a bear market are the times of the companies that won’t be hurt that much by volatile times. Take a look at stable companies that provide commodities, real estate, retailers, food producers, and basically what we use in our everyday life. They may now seem to be growing that rapidly but it’s a safe harbor in a storming part of the economic cycle. A bull market is good for IT and AI, pharmaceutical and biotech, startups of all kinds. We aim for growth and sometimes companies that wouldn’t perform great during other times may be in a trend during the bullish periods. However, a smart investor knows not only parts of the cycle but takes a closer look at each company’s performance. Some companies will be profitable just because they’re in a trend and to identify it we share some ratios that will be worth checking.
Bull versus bear market: universal ratios to compare
1. Price-to-earnings ratio over time. Is a company overvalued or undervalued in comparison to the industry average? 2. Strategy and management. Does this company take care of the future and have a clear strategy and reliable management? 3. CAGR. The compound annual growth rate helps to identify how well the stock has performed against the market index. 4. Watch the trend. Do not miss the general trend taking care of other aspects. This is still one of the most significant factors when you make a decision whether to invest or not.
Is a bear market good or bad?
Even though a bear market may seem scary, it’s a natural thing as the change of seasons. Is winter bad? No, but we still prepare in case of a cold winter. A smart investor always has a Plan B (C and D also).
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