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What to do about the ‘bulls’ and the ‘bears’

You have likely heard the terms ‘bull market’ and ‘bear market.’ A bull market is one where stock markets are rising and investors are feeling confident: a bear market is the opposite. ‘Bullish’ has even come to be used in a wider sense, meaning generally optimistic: ”I’m feeling bullish about our chances of beating United this afternoon.”

But what do the terms really mean? What have been the most pronounced bull and bear markets in history? And what are the implications of bull and bear markets for investors?

A bull market – sometimes termed a bull run in the US – is a long, extended period in the stock market when prices are rising. One common rule of thumb to define a bull market is prices increasing at least 20% from their most recent low, with signs (and investor confidence) suggesting that they will continue to rise. 

Again, a bear market is exactly the opposite. The rule of thumb is that prices are down 20% from recent highs and investors are generally pessimistic. Where a bull market might be underpinned by strong economic data on, for example, jobs and growth, a bear market will see bad news on the economy. 

The good or bad news might be confined to a single country or – in our increasingly interconnected world – relate to the wider global economy. We saw a good example of this last year, when the pandemic coincided with the trade tensions – and reciprocal sanctions and tariffs – between the US and China. 

2020 therefore saw a bear market in many countries – although it is worth pointing out that many of the world’s leading stock markets actually gained ground last year. The most famous bear market, of course, was during the late 1920s. Highlighted by the Wall Street Crash, the bear market lasted nearly three years and saw the US S&P index lose more than 80% of its value.

Generally it is accepted that there have been eight bear markets from 1926 up to the bear market of 2020, ranging in length from six months to almost three years, and seeing declines in stock market values from 21.4% to the 83.4% drop of the late 1920s. 

There have been half a dozen bull markets since the end of the Second World War, with the one starting in March 2009 (after the global financial crash) generally held to be the longest, arguably running for 11 years until Coronavirus brought it to an abrupt end. Could we see another bull market as the world ‘bounces back’ from the pandemic? Time will tell.

One thing is certain though: investor psychology plays an important part in bull and bear markets. In a bull market it is tempting to think that every penny you have should be invested – and invested as aggressively as possible – while in a bear market many investors simply want to sell everything. But no investor can time bull and bear markets perfectly: you may invest just as the market finally turns down: you may sell everything just as the market finally starts to climb again. 

Bull and bear markets are not times to abandon long-held financial plans. Rather they are times to remember that saving and investing is always a long term commitment – and to talk to your financial advisers if you have any concerns.

Sources
https://www.investopedia.com/insights/digging-deeper-bull-and-bear-markets/

https://www.ft.com/content/6b987f46-644f-11ea-b3f3-fe4680ea68b5

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