Bear market vs bull market: Strategies, predictions, and how to invest (2024)

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• A bear market describes a declining stock market of at least 20% compared to its most recent high.
• A bull market describes a period of continuous growth in the stock market of at least 20% and often coincides with a strengthening economy.
• Bull markets are generally a more profitable, but investing during bear markets can be beneficial, too.

You may have heard the terms "bear" and "bull" thrown around by friends, family, or coworkers debating the stock market. What do these terms actually mean, and why do they matter?

Understanding investor lingo is key to grasping the market's current tone and making smart investing choices. Both bulls and bears are intimidating animals, but in terms of the stock market, you'll generally have luck running with the bulls and keeping your distance from the bears.

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Bear markets: Definition and overview

A bear market is an extended period of time when the stock market falls at a continuous rate of at least 20% compared to its most recent high. As stock prices plummet, the economy takes a nose dive, unemployment rates often rise, and corporate profits decline. In short, it's bad news bears.

Unlike stock market corrections (in which there's only a 10% drop), bear markets generally last longer and have a more substantial impact on the economy.A bear market may indicate — but not guarantee — a possible recession since bear markets often go hand in hand with recessions.

"A recession means that the economy is contracting and there is an increase in the number of individuals who would like to be employed but cannot find a job," says Teresa J.W. Bailey, CFP and senior wealth strategist at Waddell & Associates.

The National Bureau of Economics (NBER) will officially announce a recession when gross domestic product (GDP) — which correlates with a bear market — declines for at least two consecutive quarters.

One of the easiest ways to follow the market's state is by tracking major indexes such as the Dow Jones Industrial Average or the . If you notice these indexes are on a downward slope, the market will likely shift toward a correction or bear market.

Causes of a bear market

Several factors can cause a bear market, including:

• Public health crises
• War or similar conflict
• Geopolitical crises
• Major economic shifts

But the most prominent cause is a general weakening or slowing economy. Investors will start selling their stocks as they lose confidence in their current assets.

For example, in 2020, the Dow Jones dropped more than 30% of its value as the first wave of the COVID-19 pandemic struck. With a nearly 40% decline, the economic impacts of the pandemic dethroned the DJIA from its all-time highs.

"The most opportunistic way to prepare for investing in a bear market is to take some of your profits off the table, meaning sell some of your best-performing stocks and keep a bit more cash on the sideline than usual," Bailey says.

Characteristics of a bear market

• Pessimistic outlook: Investors will often develop a negative outlook on the market and may stop buying/start selling current investments. They may also start investing in less-risky assets. This results in an increase of available shares with decreased prices.
• Decline in stock value: Stock prices drop well below their book value (a calculation to determine a company's worth based on its assets) which can lead to higher unemployment rates, hiring freezes, and layoffs.
• Companies' profits decline: As investors become pessimistic and consumers start buying less, profits fall, and corporate earnings decline. This leads to more layoffs, a decline in funding, and a decrease in production.
• Economic decline: Markets, production, and spending significantly decline as the risk of deflation becomes more apparent

Timeline of bear markets

Unlike recessions that persist until the economy bounces back, a bear market only needs to recover by 20% to end.According to data from the University of Idaho, a bear market lasts an average of 1.3years.

A secular bear market — a bear market that sometimes rises only to plummet further — can last between five to 25 years. A cyclical bear market, on the other hand, usually only lasts a few months.

Bull markets: Definition and overview

A bull market, otherwise known as a bull run, is an extended period during which stock prices increase (usually 20%) compared to their most recent low. As the market continuously grows, investors become more optimistic and buy more shares.

"Bull markets happen when the economy is strengthening, and stock prices are rising," explains Bailey. "Bull markets are typically accompanied by a low number of individuals needing employment and investors who are flush with cash to buy into the markets."

Bull markets often indicate a general "up" period in the economy, especially if the business cycle is in the expansion or "normal" phase. GDP increases as consumers increase spending and unemployment rates decline.

"There's high investor confidence. And because of that, people are buying more stock, they're investing in companies, and those companies are showing outsized performance results," says Christian Nwasike, principal & executive managing partner at Practice Management Consultants, LLC, and chairman of the board at the Association of African American Advisors (AAAA).

During the expansion phase of the business cycle, businesses steadily grow their profits as consumer demand for goods and services increases. In turn, businesses increase production, hire more employees, and raise prices.

Investors' confidence starts climbing, and the overall demand for stocks and similar assets increases. Businesses and companies usually get higher equity valuations, which usually means high initial public offerings (IPOs).

Causes of bull markets

A bull market occurs when the economy is strong and getting stronger. The economy benefits from higher consumer spending and increased business investments. The more people spend on goods and services, the more money those businesses have to grow, create more jobs (which makes more consumer spending), and invest in new technologies.

Other factors that may contribute to economic growth are:

• Infrastructure spending: Local, state, or federal governments spend more money on infrastructure projects. This in turn creates more jobs, ramps up production, and increases business efficiency.
• Tax cuts and rebates: Putting money back in consumer pockets often stimulates the economy as consumer spending increases.
• Deregulation: Regulations restrict businesses and corporations from growing too large. In the 1980s the Reagan administration deregulated several industries, including financial institutions, and many economists consider this to be the reason for the strong economy throughout the 80s and 90s.

Characteristics of a bull market

• Optimistic outlook: Investors start buying again as prices increase, hoping to sell for a higher value.
• Increase in stock value: With investors buying back into the market, stock prices increase due to supply and demand.
• Companies invest in themselves: As the economy is on the rise, consumers start buying again, and production increases. Businesses can hire more employees and expand with the growing market.
• Risk of inflation: Inflation can occur when the prices of goods and services increase in the economy over time.

Timeline of bull markets

The length of bull markets varies, but they are often longer than bear markets. On average, bull markets last 6.6 years.

The longest bull market in history was over 131.4 months following the Great Recession. From March 2009 to March 2020, the S&P 500 increased by 400% and gained over $18 trillion in value. The Dow Jones reached a record-breaking 29,551 points.

Bear market vs. bull market

Why is it called a bear vs. a bull market?

No one can say for sure where the term "bear" came from to describe a struggling stock market, but some etymologists believe it comes from an old proverb that warns folks not "to sell the bear's skin before one has caught the bear." But the animal comparison could also be a way to describe the stagnate and slow actions of pessimistic investors that "hibernate" during a struggling economy.

On the other hand, "bull" is believed to come from the idea that provoked bulls to charge at full speed. Confident investors can't predict where the stock market is headed, but that doesn't stop many from sprinting ahead.

Which is better to invest: Bull vs. bear market

In general, bull markets are a better time to invest. Yes, stock prices are higher, but it's a less risky investment time. You'll have a greater chance of selling assets for a higher value than when you bought them.

"The markets can be very volatile in the short term," says Nwasike. "It's important to have a long-term perspective."

Investors become pessimistic during a bear market and avoid buying shares as their equities may decrease in value. Prices will drop, making buying appealing, but it can be risky. But depending on your financial plan, it may be worth investing in.

When might it be a good idea to invest in a bear market? "If your financial plan calls for a time horizon greater than a few years for the funds, and you aren't carrying debt with a high rate of interest," Bailey says.

If you're itching to move, a bear market can be a great time to diversify your portfolio. You can invest in some less-risky assets like bonds or consider seeking out dividend-paying stocks. Just make sure you don't get carried away.

If you're unsure of your next moves, the best financial advisors can help you make smart investment decisions and give expert advice for short-term and long-term investing goals.

"It's important to spend time with a professional who can chart a plan based on where you are in life and where you want to go," says Nwasike.

Bear vs. bull markets FAQs