Don’t Fight with Bears

DEFINING BULL versus BEAR MARKETS

What is the difference between a Bull and a Bear market, and what to look out for!

“The farther back you can look, the farther forward you are likely to see.”
Winston Churchill

History tells us that investments can go down as well as up. It’s a well-worn, renowned disclaimer designed to provide a caution to all; they don’t always go the way you want them to. Less well known is the pattern the financial markets have followed throughout history.  In the financial world, this pattern is referred to as Bull and Bear Markets.
It may be too obvious to explain that Bull follows Bear, and Bear follows Bull, but perhaps slightly less obvious is that there are four stages to the pattern. Growth and Peak; representative of a Bull market and Contraction and Trough; representative of a Bear market.
A significant feature of the pattern is that the ‘Growth’ period is almost always slow and long. The contraction period is, more often than not, alarmingly quick, like falling off a cliff straight from Peak and Trough. Interestingly, the recovery period between Trough and Peak tends to be a complete reverse, taking an agonisingly slow time to climb back up, therefore historically taking a long time to recover from losses.
Below we’ve pulled together a short guide to help explain the terminology.
Bull Market
01.
What is a Bull Market?
  • The expression ‘Bull Market’ describes a market that is on the rise.
  • This term is often related to the stock market, however can be applied to anything traded; bonds, real estate and currencies for example.
  • The rise and fall of these market prices are normally constant, so the term “Bull Market’ is normally saved for the extended periods of time when a big portion of the prices are rising.
  • Typically, a market is defined as a bull market when its value has risen 20% from a 52-week high.
  • Sometimes a steep rise or fall in market prices can simply be a market correction rather than a defined type of market. A rise of 10-20% is considered a market correction, with one higher than 20% considered a bull market.
04.
What are the risks in a Bull Market?
  • Although hard to distinguish when the ‘Growth and Peak’ of the market will be, most losses will be small and only temporary. Normally, investors can confidently invest in equities with a high probability of making a return.
02.
What causes a Bull Market?
  • A Bull Market occurs when the economy is doing well; levels of unemployment are low, Gross Domestic Product (GDP) is high, and stocks are consistently rising.
  • There is often strong share demand and low share supply during this time. This is because as the interest in the markets increases, so do share prices. In other words, many investors are wishing to buy, while few are willing to sell.
03.
What are sensible moves to make in a Bull Market?
  • The ideal thing for an investor to do in a Bull Market is take advantage of the rising prices. They can do this by buying at a low trough, just as the market begins to grow, and then selling at a high peak, just before it drops back down.Unfortunately, there is no specific metric to identify any peaks or troughs. They are hard to predict, so knowing the right time to do this accurately is tricky.
01.
What is a Bull Market?
  • The expression ‘Bull Market’ describes a market that is on the rise.
  • This term is often related to the stock market, however can be applied to anything traded; bonds, real estate and currencies for example.
  • The rise and fall of these market prices are normally constant, so the term “Bull Market’ is normally saved for the extended periods of time when a big portion of the prices are rising.
  • Typically, a market is defined as a bull market when its value has risen 20% from a 52-week high.
  • Sometimes a steep rise or fall in market prices can simply be a market correction rather than a defined type of market. A rise of 10-20% is considered a market correction, with one higher than 20% considered a bull market.
02.
What causes a Bull Market?
  • A Bull Market occurs when the economy is doing well; levels of unemployment are low, Gross Domestic Product (GDP) is high, and stocks are consistently rising.
  • There is often strong share demand and low share supply during this time. This is because as the interest in the markets increases, so do share prices. In other words, many investors are wishing to buy, while few are willing to sell.
03.
What are sensible moves to make in a Bull Market?
  • The ideal thing for an investor to do in a Bull Market is take advantage of the rising prices. They can do this by buying at a low trough, just as the market begins to grow, and then selling at a high peak, just before it drops back down.Unfortunately, there is no specific metric to identify any peaks or troughs. They are hard to predict, so knowing the right time to do this accurately is tricky.
04.
What are the risks in a Bull Market?
  • Although hard to distinguish when the ‘Growth and Peak’ of the market will be, most losses will be small and only temporary. Normally, investors can confidently invest in equities with a high probability of making a return.
Bear Market
01.
What is a Bear Market?
  • The flip side of a Bull Market is a Bear Market. This refers to a market in decline; where share prices have dropped, there is a downward trend in the economy and unemployment is high.
  • The length of a Bear Market is often far shorter than a Bull Market, only lasting an average of two to three years as opposed to six to seven years for a Bull market, however the loss within this time period is much greater.
  • Typically, a market is defined as a bear market when its value has fallen 20% from a 52-week high.
  • Sometimes a steep rise or fall in market prices can simply be a market correction rather than a defined type of market. A fall of 10-20% is considered a market correction, with 20% or more considered a bear market.
04.
What are the risks in a Bear Market?
  • Chances of losses are much greater in a Bear Market as prices are continually losing value.
  • Even if you do invest in the hope of an upturn, you are more than likely to lose out before any turnaround happens.
02.
What causes a Bear Market?
  • Often, it is a weak, slow economy that brings around a Bear Market, but any intervention from the government can also be a trigger, e.g any change in the tax rate can lead to the market declining.
  • Any decline in stock market prices shakes investor confidence, often forcing them to take their money out of the market. This in turn, causes the decline in the stock market.
03.
What are sensible moves to make in a Bear Market?
  • In a bear market, the chances of loss are greater because prices are continually losing value. Investors are better off “short selling” or making safer investments, such as fixed-income securities.
  • An investor could turn to defensive stocks. These are often only minimally affected by changing market trends and are therefore more stable in an economic slump.
This chart shows the pattern that US and UK stocks have both followed over the last 80+ years. It demonstrates that Bull Markets tend to last an average of 6-7 years, with a cumulative average return of over 200%.  Conversely, Bear Markets often last less than 2-3 years, but with a potential loss of nearly 50%.
What to look out for

There have been numerous Bull and Bear Market cycles since 1929, with the economic recession in 2008 being the last Bear Market etched in our memories. It delivered a cumulative “Contraction and Trough” fall of -41% and started less than five years after the previous Bear Market in the late 90’s, which at the time, abruptly curtailed 12 years of prosperity with a similar cumulative fall of -43%.

In the current Bull Market, as we start enjoying our tenth year of continued growth, there is undoubtedly an abundance of economic uncertainty.  However, if there is one thing we can deduce from the past, it is not to fight with bears, rather take the growth we have enjoyed over the last nine years and find a way to PROTECT IT!

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