Investors will likely have heard the terms bull and bear market before. They might even have a firm grasp of what they mean.
The terms themselves are fairly straightforward but the causes of them – and understanding what they mean for an individual’s investment – can be more complex.
The last few years have seen the markets described using both terms.
As recently as August 2018, CNN was declaring ‘the longest bull run in history’ as the market recovered from the global financial crisis of 2018. Beginning on 9 March 2009, the run – that ended in March of this year – marked the longest period of uninterrupted gains in American history.
The global coronavirus pandemic has caused – and continues to cause – massive volatility in the markets and saw prices crash in the first quarter of 2020.
So, what is a bull and bear market? What causes them? And what do they mean for your clients?
What is a bear market?
A bear market is defined as an investment price decrease of at least 20% or more.
The US Securities and Exchange Commission confirms that a bear market is ‘a time when stock prices are declining and market sentiment is pessimistic. Generally, a bear market occurs when a broad market index falls by 20% or more, over at least a two-month period’.
A bear market is usually caused by a loss of confidence in the markets.
The stock market hates uncertainty and the arrival of the coronavirus pandemic brought uncertainty in abundance, triggering a stock market crash.
On 12 March, the BBC reported that the FTSE 100, the S&P500 and the Dow Jones had all suffered their worst falls since 1987.
As prices fell, confidence in the market vanished too.
What is a bull market?
A bull market is, predictably, the opposite of a bear market – that is, an increase in the price of an investment over an extended period, usually a rise of 20% or more.
It is ‘a time when stock prices are rising, and market sentiment is optimistic.’ Again, the US Securities and Exchange Commission states that the market movement – in this case a rise – should be over at least two months.
The bull market that ended with coronavirus had been running for over ten years.
Bull and bear markets over time
Although the two types of market are effectively the opposite of each other, in terms of percentage rises and falls, they behave in a far from symmetrical way.
The graph shows bull and bear markets over time, including their duration, size, and number.
Notes: Calculations are based on FTSE All-Share (GBP Total Return). A bear market is defined as a price decrease of more than 20%. A bull market is defined as a price increase of more than 20%. The plotted areas depict the losses/gains ranging from the minimum following a 20% loss to the respective maximum following a 20% appreciation in the underlying index. Time period: 31 January 1900 to 31 December 2018. Calculations based on monthly data. Logarithmic scale on y-axis. Source: Global Financial Data.
It is clear that the number of bull years greatly outweighs the number of bear years. Since 1900 there have been over 103 bull years compared to just 16 bear years.
The bull years last longer too – an average of 7.9 years for a bull market compared to just 1.3 years for a bear market.
What is a bear market rally?
According to American business magazine Forbes, ‘bear market rallies are characterised by a sense of hope that markets are heading back toward their highs, signalling a recovery and potentially a new bull market’.
Bear market rallies can happen often and last for weeks or months. This can be deceptive and lead investors to hope a bull run is on the way, only for the bear market to return.
The Forbes report goes on to state that the S&P 500 has witnessed 14 separate bear market rallies since the 1929 crash which helped to cause the Great Depression.
Following the record lows of 12 March, FTAdviser reported 24 March brought ‘some relief when the UK’s blue-chip index saw its second-biggest daily jump on record – closing up 9.1%.’ Two days later it dropped again.
While it’s true that bear market rallies can lead to bear market recoveries and eventually to bull markets, they can also lead to ‘bear traps’.
Sharp spikes could fool your clients into thinking a recovery is on the way, only for the market to bottom out.
Get in touch
With coronavirus still very much a part of all of our lives, it is more important than ever for your clients to invest unemotionally.
We’ve seen that bear markets are often shorter than bull markets and the only way to take advantage of the recovery and subsequent bull market is to be in the market when it arrives.
If you have any clients that are interested in talking to us about current market volatility and how to invest during this period of uncertainty, please get in touch with us. Email email@example.com or call 0116 2407070.
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