Overview – Bear and Bull Markets
Like any other field, investing has its fair share of jargon and other technical terms. Of all the investing jargon that exists, two of the most common terms you’ll likely hear are “bear market” and “bull market”.
Perhaps you’ve seen some news outlets mention the terms “bear” and “bull” markets before and have wondered what exactly those terms mean.
In this article, we will go over those terms, their importance to investors, and some things to keep in mind.
Understanding Bear and Bull Markets
Even if you have no prior knowledge of what these terms mean, they sound relatively simple, and unsurprisingly, they are.
Bear markets denote periods of depressed economic activity and low investor confidence. In a bear market, investor confidence drops precipitously, characterized by mass sell-offs and very little appetite to commit capital to any new investment operations.
When bearish conditions prevail, companies usually begin laying off employees, leading to a rise in unemployment, which leads to less consumer spending, further perpetuating the positive feedback loop of mass investment selling and very little buying.
On the other hand, bull markets are periods of strong economic growth. Investor confidence is high, unemployment is low, and market prospects are strong.
Investors pour large amounts of money into capital markets, causing asset prices to rise, leading to even greater investor confidence.
There is no consensus on why the terms “Bull” and “Bear” were chosen, but one explanation may be that a bull is usually a very aggressive animal, charging forward with great might and vigour.
Some species of bears are known to hibernate during the winter, where they enter a state of minimal activity, low body temperature, and reduced metabolic rate. During this time, bears are not too keen on exerting themselves.
At the time of this writing, the most recent bull market ran from 2009 to early 2020, which was the longest bull market in U.S. history.
After the COVID-19 pandemic occurred, the consensus is that most markets around the world became bearish – unemployment remains were high, investor confidence reached all-time lows, and there was lots of uncertainty about the coronavirus and financial markets – some of that uncertainty that lingers even today.
The Economic Cycle (Boom and Bust Cycle)
Bear and Bull markets usually coincide with specific parts of the economic cycle. The economic cycle represents the transient state of an economy, measured by the GDP of a country or region over time (usually in years).
Other economic factors such as investor confidence, unemployment rates, and interest rates can also be used to determine the stages of the economic cycle.
The economic cycle can usually be divided into four distinct phases:
1.) Peak
2.) Contraction
3.) Trough
4.) Expansion
The peak is when economic health is at its strongest – unemployment is low, investors are confident, and consumers are spending.
Eventually, the strong market sentiment starts to fade and the economy begins to contract – unemployment rates rise, consumers begin to spend less, and investor confidence begins to decline.
Inevitably, the trough is reached. This represents a low point in the economy. Eventually, market activity begins to pick up again, unemployment begins to edge lower, and consumers are starting to spend again. This is the expansion phase, which goes up until the peak – the cycle then repeats once again.
Although the figure above is evenly spaced, in reality, this is not the case. Subsequent peaks and troughs do not last for equal amounts of time.
Not only that, but some peaks are higher than others, and some troughs are deeper than others. The figure above is only for the sake of demonstration, but a true economic cycle graph would be much more erratic.
Going back to our discussion of Bear and Bull markets, when a market begins to contract we informally enter a bear market. When markets begin to expand and signs of a strong economy are showing, this usually signals the start of a bull market.
The Economic Cycle and Timing the Market
If periods of robust and lacklustre economic growth happen from time to time, this may lead some investors to falsely conclude that they can accurately predict when to “buy low, sell high”. That is, an investor may be tempted to time the market. This idea of market timing has previously been discussed.
Remember, the economic cycle is not evenly spaced out. Some bull markets last for only a few years, while others last for more than a decade. Similarly, not all recessions last for the same amount of time. Past economic data is not an accurate indicator of what will happen in the future.
Bear and bull markets are usually identified in retrospect, that is, after enough economic data has been gathered and analyzed from the past. It’s virtually impossible to predict when they will happen before any data has been gathered.
If predicting when bear and bull markets occurred was a simple task, then every investor would be making these predictions on a regular basis and this information would be common knowledge.
Anyone who claims to accurately predict when the next bear and bull markets will occur implies that they know exactly when a peak will reach its highest point and know exactly when a trough will not go down any further.
That is, they know when investments will reach their lowest price, which is the perfect time to buy, and when they will reach their highest price, which is the time to sell.
If such an individual exists and is currently reading this, then please feel free to disregard this article and the entire field of investment analysis. Otherwise, it is best not to get caught up in the speculative practice of trying to predict future market movements by relying on the economic cycle.
Wrapping Up
The terms “Bear” and “Bull” market are used frequently to describe current economic conditions. Bear or Bull markets usually coincide with specific points of the economic cycle.
Although the pattern of boom and bust has been observed repeatedly throughout history, past trends cannot predict specific future events. The data gathered in an economic cycle cannot and should not be used as a tool to try and predict future economic outcomes.
It is in every investor’s best interest to reject the idea of timing the market, and instead continue to perform their own investment analysis and perform trades only when investment merit has been identified.
