In recent times you may have heard the terms ‘bull’ and ‘bear’ thrown around in relation to the stock market and the economy. These terms describe different behavioural market trends and can help you to understand what is occurring across global markets which can in turn inform your investment strategy. Continue reading the following article to learn more about these phenomena.
What is a bull market?
A bull market describes the share market when investor sentiment is positive which results in investors feeling more confident and are therefore more incentivised to buy. You may be familiar with the term ‘bullish’ which refers to when a country or the world has a strong economic outlook and unemployment rates are low.
What is a bear market?
Conversely, a bear market is characterised by a fall in markets by more than 20%. In these conditions, share prices are often consistently dropping which causes investors to become fearful and often follow this downward trend by selling their holdings. This, however, only exacerbates the falling market. A bear market more often occurs during or around periods of economic recession which are associated with reduced consumer expenditure, negative economic outlook and increasing inflation. This causes unemployment to rise and the economy to slow down. To read more about what to invest in when inflation is on the rise, click here.
Investor Psychology
In addition to broader economic, policy and political conditions, a considerable driving factor of a bull or bear market is overall consumer sentiment and psychology towards markets. If sentiment is low or negatively skewed, investors have less confidence about market performance which directly impacts how markets perform and investors are more likely to sell.
This also works in reverse, when consumers are confident and have a positive sentiment towards markets and economic conditions, they are more likely to buy and take bigger risks in the hope of generating greater returns. It is also important to consider that quick changes in market conditions that are a result of isolated political, social, or economic issues are not necessarily indicative of a particular kind of market, and these trends are determined over longer periods of time. There are also periods of stagnation that cannot be characterised as either a bull or bear market. To read more about stagflation, click here.
How to invest in bull and bear markets?
In a bear market, shares and stock prices are likely to be declining as investors lose confidence and leave the market. For investors who can recognise this trend, it may be a good opportunity to take advantage of lower share prices which essentially means you can buy particular holdings on ‘sale.’ However, it is important to remember that you may be exposed to additional losses if markets continue following a downward trend and may take longer to recover. Thus, it is critical that investors follow a long-term approach and invest according to a risk profile they are truly comfortable with.
In a bull market, returns are likely to be higher as investors enter the market due to positive performance. Therefore, investors may choose to realise some of the profits they have enjoyed or can continue to hold these investments in the hope of the market continuing to accelerate. In any case, it is important for any investor to remain disciplined to their investment strategy and understand their individual investment time horizon prior to taking risks that may not pay off.
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