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.
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Financial cycles are important, and you need to always keep in mind your main goals as an investor. That’s why it is crucial to understand the difference between a bull and bear market. In this article, we will examine both phenomena, look at their advantages and weaknesses, and figure out how to profit from them.
Bull Market Definition
A bull market trend is defined as a situation when the market shows a relatively long-term and significant growth of financial asset prices, starting from 20%. This period can last only for a few months or become a tendency for years. During a bull market, profits can be made by selling assets at a higher value than they were purchased.
A bull market is one of the indicators of growth in the local or global economy when there is an opportunity to take affordable loans, improve efficiency, increase the number of jobs and develop production. As securities rise during such a trend, it is vital to notice when it begins and, even more important, to sell your assets on time — when the growth ends. However, it is challenging to predict the exact beginning of a "bullish" trend in the market, although the first signs can be seen on the charts.
Let's take a look at the algorithm that will help you profit in a bull market:
- Take a "long" position at the beginning of the trend;
- Constantly analyze the situation in the market and be ready to take immediate action;
- Exit the asset before (or right after) its price begins to decrease.
Bear Market Definition
A bear market is a period when asset prices are falling for a long time. The name refers to bears for a reason: during an attack, these animals knock their prey down and tear it apart. This is similar to what bear investors do when they buy cheap stocks and securities and make money on falling prices.
A market is said to be bearish when there are clear signs of its steady decline — usually when financial assets lose more than 20% of their previous highs. According to experts, during a bear market, everything is in a state of panic, which is reported in the media, trading volumes increase, and volatility rises. Most often, this market trend reflects a general decline in the economy.
It is necessary to distinguish a "bear market" from a simple correction, the experts say. A correction is a relatively short-term decline, which usually lasts up to two months, although markets lose up to 10-20% during such periods. During the correction, inexperienced traders may start selling their assets, so it is crucial not to panic during correction and stick to the long-run strategy. They take place in a growing market and are a good time to buy cheaper assets at an attractive price, say experienced traders.
To get the most money out of the bear market, you should stick to the following algorithm:
- Don’t sell while in panic, make only well-thought decisions;
- Analyze the market and look for entry and exit points;
- If your portfolio is set up for growth, buy cheaper assets that may rise in the long run.
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 a bull market vs. bear market situation. 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 of a bull vs. bear trading has opportunities for investors.
To sum up, in the bear vs. bull battle, 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 will miss out on information about the start of the new bear market lifecycle.
Bull vs. bear markets: a closer look
First, it is important to identify which part of the economic bull vs. bear cycle we are in. A smart investor knows that they shouldn't believe the panic in the news. We look at the numbers when defining a 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 bull market versus bear market 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 bull versus bear market period: the ratio shows the change in price for a group of goods that a consumer buys. This ratio is the best indicator of inflation, and if you see these numbers growing, it is a sure sign of upcoming bear times. Economists frequently criticize this index, but as an investor, you do not need the exact percentage or perfectly counted ratio: the dynamic is the most critical part. Altogether with other ratios mentioned further in the article, it may give you the full picture of a 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 from a time perspective
The pandemic and the economic war between China and the US, one more Middle Eastern political collapse, and many other factors may influence the current situation in bear vs. bull trading. 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 cause 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, characterized by the 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 bull and bear trading strategies wisely.
Is it better to buy in a bear market vs. a bull market?
The short answer is in both. Your investing strategy may differ as well as your behavior in a 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 the meaning of bull vs. bear is not enough to take measures to protect your portfolio, so let's get to practical advice.
▶️ A bearish market is a time of reliable and stable tools like certificates of deposits, treasury bills, and 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 we say yes to commodities and gold in a bear market.
From a long-term perspective, it is high time to buy underpriced shares of companies that are suffering from bearish times but will soon recover. Remember that even though stocks of companies with excellent performance may fall, the decline can be used as a good entry point. Make sure your portfolio is diversified enough and has all the stable tools, allowing 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. The majority of investors in a bear market 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 a 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, growth is fast, and some failures follow shortly.
- It’s easier to try different strategies and short-term investments. Regular intervals will help to find the best entering and selling points for taking profit from ups and downs.
- Time to diversify your portfolio by combining young and well-performing companies, shares, and exchange-traded funds. Growth is essential, 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 prepare for any market condition. 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 tough times and remain stable and profitable. One of them you have just read, and we hope you got the idea of what is a bull market and a 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 best times for 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 and dangerous to invest in, it’s a natural thing as the change of seasons. Is winter bad? No, but we still prepare in case of a cold winter and bad weather. A smart investor always has a Plan B (C and D also).
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