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

Markets fluctuate throughout the year, rising and falling with other economic trends. When investments grow, it’s called a bull market. When stocks and markets fall, it’s a bear market. Knowing these trends is important for understanding economic conditions and investment opportunities.

Learn more about the differences between bear and bull markets so you can feel confident in your investments. Understanding these concepts and getting your economic news from reliable sources can make you more informed about the world around you.

What Is a Bull Market?

A bull market is a period where stock market prices are rising and investors are optimistic about future growth. The Securities and Exchange Commission (SEC) defines a bull market as “a rise of 20% or more in a broad market index over at least a two-month period.” However, some economists may call a market bullish if it shows rapid or strong growth compared to previous trends.

Causes

The main cause of a bull market is positive investor sentiments. When investors feel confident in the future of the market, they’re more likely to buy into it, causing growth. This creates a snowball effect where existing growth is spurned by even greater investment.

A few economic trends can contribute to bullish perceptions of the market:

• Low interest rates: When the Federal Reserve lowers interest rates, individuals and businesses have more cash to spend, leading to economic growth.
• Low unemployment rates: High employment means more individuals have cash to spend in the economy. It also often means businesses are doing well and are more likely to be sound investments.
• Higher spending: A positive Consumer Confidence Index and high spending rates can contribute to market growth.

For example, if retailers have a strong holiday shopping season where consumers spend a lot on gifts and travel, investors might feel confident going into the new year, creating a bull market.

Effects

The perception of a bull market can change investor behavior and send ripple effects through the economy. Here are a few things that happen during a bull market.

• Trading increases. More people buy into stocks or adjust their portfolios to capitalize on perceived future growth.
• Companies are valued at higher rates. Because more people are buying shares, companies might have higher perceived values.
• More companies might enter the market.There could be an increase in initial public offerings (IPOs) because companies want to take advantage of the current desire to buy.

Despite the upsides, there are a few potential drawbacks of bull markets. One negative effect is inflation. Companies might believe they can charge more for their products and services because of the strong market, causing inflation to rise. Macroeconomic trends can also affect inflation, like a strong dollar leading to exchange rate inflation.

How Long Do Bull Markets Typically Last?

Research shows that, between 1926 and 2019, the average bull market lasts 6.6 years. Most recently, the United States was in a bull market from 2010 until the COVID-19 pandemic of 2020. The pandemic rocked global economies and caused investors to act more conservatively, transitioning to a bear market. As of 2024, America has returned to a bull market.

How To Invest in a Bull Market

If you’re confident in the current market, you may decide to invest your money in various growth opportunities. Here are a few best practices for investing in a bull market:

• Avoid buying high-cost stocks. The adage to “buy low, sell high” rings true in a bull market. Look for lower-valued investments that have a lot of room to grow in the current market.
• Maintain a long-term view on investing. Even if you have confidence in short-term growth, have a long-term plan in mind.
• Avoid meme stocks. Internet trends can affect specific stocks and cause their values to skyrocket, but chasing meme stocks is risky and potentially costly.
• Focus on diversification. Look for a variety of different industries and companies to invest in. If one market loses its value, it won’t harm your entire portfolio.

Just because a market is bullish doesn’t mean you should act irresponsibly in your investing. Though you might feel more confident taking risks, remember that trends can change faster than expected.

What Is a Bear Market?

If a bull market occurs when stock prices are rising, then a bear market is when stock prices are falling. Similarly, the SEC says a bear market occurs when “a broad market index falls by 20% or more over at least a two-month period.” During a bear market, investors are worried about the future. They might notice that markets are slowing down or falling and feel like the situation will get worse.

Causes

Bear markets occur when investors feel pessimistic about the future, causing them to act conservatively. This can exacerbate a bear market because conservative investments further slow growth. However, investors don’t become pessimistic overnight. Here are a few reasons they might be concerned:

• Economic instability: War, famine, trade disputes, and tense international relations can affect global markets and make investors uncertain.
• High inflation: When inflation rates are high, consumer budgets don’t stretch as far. This causes people to reduce spending, harming markets.
• National events: Major occurrences cause changes in investing. For example, the presidential election can impact confidence in economic futures.

Simply put, macroeconomic trends make investors worried about the future, causing them to change their investment plans to protect their funds.

Effects

The effects of a bear market can change entire economies, even affecting the same factors that caused the bear market in the first place. Here are a few things that occur during a bear market:

• Stock prices drop. Investors sell shares or move to more conservative markets. They look for less risky investments.
• Demand for goods and services decreases.This can potentially cause deflation or disinflation, which is the slowing of inflation.
• Unemployment can rise. When demand falls, companies sell fewer goods and services and are less profitable. This can potentially lead to layoffs.

If people feel like the bear market is going to worsen, they might pull back on investments and avoid risks. This causes the market to slow even further.

How Long Do Bear Markets Typically Last?

Over the last century, bear markets have been considerably shorter than bull markets. Between 1926 and 2019, the average bear market lasted 1.3 years before the economy started to rebound. This is usually because of government intervention to address high unemployment or economic instability.

Using the COVID-19 pandemic as an example, stock markets started to rise in 2021 after plummeting in 2020 because of vaccine development. The idea that people would soon be vaccinated meant travel, trade, and normal life could resume, thus returning spending and employment to normal levels. This created a transition away from a bear market.

How To Invest in a Bear Market

Even though bear markets are stressful, there are still ways to invest at this time:

• Look for stocks that will rebound. Buying when stocks are down can help you grow your wealth when they rise during the next bull market.
• Maintain a diverse portfolio. Evaluate your risk tolerance and invest in a mixture of conservative and bold stock options.
• Don’t panic. If you have existing investments, do not let a bear market scare you. It will rebound in the long run.

Bear markets might even provide more lucrative opportunities than bull markets. Even if other investors are scrambling because of a bear market, maintaining a cool head can help you make sound decisions that will pay off in the years to come.

Bear and bull markets are natural parts of the economy. Knowing these concepts can help you better understand market trends and why they occur. Ultimately, you don’t have to fear a bear market and shouldn’t feel overconfident in a bull market. Investing is all about balance.