Please leave a message and we will get back to you.Send
We all know the expression, “When you smile, the whole world smiles with you”, which feels true, doesn’t it? The same facts of life seem a lot more promising when you’re in a good mood than when you’re feeling down. We also know how quick and fickle our mood changes can be, often triggered by some small incident we barely notice.
When you hear economists discussing the bullish vs bearish factors influencing a security’s price, the bullish and bearish meaning refers to the “mood” of the market. Indeed, financial markets experience mood swings just like the human beings who make them up. When a bull market is holding sway, it doesn’t just mean stock prices are on the rise. It means financial traders believe they will continue rising. In their eyes, the facts and the data point to a single, positive economic future. And we care about traders’ feelings and outlooks very much because these are what will, either spur them to keep on buying, or convince them to call a stop to it.
Like a self-fulfilling prophecy, continued buying will push up security prices and vindicate bullish predictions. Vice versa, pessimistic views of the economic future will discourage buying behaviour and depress share prices.
But how do you know when a bull or a bear market has arrived? And what does it mean, practically speaking, when one of the two has set in?
When businesses are spending on expansion and consumers are buying lots of their products, a bull market can result. The cash inflows from sales translate into boosted revenue for companies, who are then able to hire more workers and improve their technology and production. Healthy company earnings encourage shareholders to maintain their positions or even buy more shares, which props up share prices by the laws of supply and demand. Employment levels are high, which gives people the finances to go out and make more purchases, keeping the cycle going.
You wouldn’t expect someone to experience no mood at all for very long, and the same is true of the financial markets. By their very nature, markets tend to ebb and flow, going through cycles of uneven durations in both upward and downward directions. Not every upswing in the market is called a bull market, though. Analysts will only call it a bull market if it sweeps prices at least 20% above a recent low point. This happened, for instance, on June 8, 2023, when the S&P 500 index marked off a 20% improvement on its level back in October 2022. Although it would be correct to speak about real estate or bonds as being in a bull and bear market, the terms mostly refer to the equity market as measured by one of its three main indexes: the S&P 500, the Nasdaq 100, and the Dow Jones Industrial Average.
Soon after the Second World War, from mid-1949 to mid-1956, a powerful bull market took hold in the U.S.A., driven by a consumer rush for goods and, also, strong exports. During an 86-month period, the S&P 500 gained a hefty 267%, sending back annual returns of 20% to those who had parked their money in it. When the Federal Reserve hiked interest rates and political volatility stirred in 1956, the bulls finally settled down.
Between October 2002 and October 2007, America’s real estate sector experienced intense growth after the Fed flattened interest rates. The financial entities that traded in mortgages as securities went through a boom period. However, the enthusiasm came to an abrupt end when interest rates rose again, heralding the arrival of a severe bear market in 2008.
Following the devastating financial crisis of 2008, the bulls took over again from March 2009 and dominated for the next 11 years. The S&P 500 gained more than 400% by February 2020, and unemployment dropped to its lowest in four decades.
When stock prices are falling, sentiment in the market tends to be less rosy. People are in selling mood, which depresses the prices of stocks even more. Aside from this, company earnings are less robust, and businesses are not so keen to hire. They may even take the step of laying off some of their staff. It’s at the point when stock prices have plummeted 20% below a recent peak that analysts will name it a bear market.
Looking to a recent example, in the summer of 2022, all three main stock market indexes fell into a bear market. In the case before that, the arrival of Covid-19 in March 2020 pushed the S&P 500 into a bear market – 34% deep – in the space of only one month. Understandably, traders were apprehensive about the economic and social consequences of the unknown virus, so confidence in the economy waned. The good news is that bear markets tend to pass away more quickly than bull markets, hanging around for an average of only 9.7 months as opposed to bull markets’ 2.7 years.
Misery loves company, so bear markets are often associated with recessions, but this is not always the case. The stock market crashed, for instance, in 1987, precipitating a bear market, but a recession did not appear in its wake. “Often, a bear market will begin ahead of a recession, as signals emerge that a recession is on the horizon”, explains Teresa J.W. Bailey of Waddell & Associates. The reason for this is clear: What drives the market is trading sentiment, so people’s gloomy views of the economy tend to weigh on stocks before the data prove that GDP is actually contracting.
A recession meets its end when GDP numbers show the economy is looking vigorous again, but the concurrent bear market will continue until stock prices make up 20% over a recent low. Thus, a bear market may live longer than the recession that was its bedfellow.
If stock prices lose between 10% and 19% of their value, the word used by economists to refer to this would be “correction”. This doesn’t necessarily portend a deeper drop in the market because it’s part of the natural run of things that traders’ sentiments grow more and then less optimistic with the passing of time. Only four of the 22 corrections recorded between 1974 and 2020 developed into bear markets: in 1980, 1987, 2000, and 2007. The average lifespan of a correction is about four months.
Turning back to bull markets, it’s important to remember that stocks will almost never just rise without taking a step back. They tend to retrace some of their bullish path before mustering strength for another upward push, and these periods are called retracements.
Much like our own sour moods, bear markets eventually reach a point where they can’t get any lower. It may happen that some kind of stimulus will spark off consumers’ desire to spend or companies’ willingness to borrow, for instance, lower interest rates. As business activity gets going again, confidence in the economy returns and stock values start rising.
Take note, however, that, in almost all cases, you can only know that the low point has been reached after the market has started making its comeback. Don’t be convinced by analysts who claim prophetic knowledge of the moment the bear market meets its bottom because they’re often proven wrong. The same applies to the peaks of bull markets. It’s better to accept that the onset of a bull and bear market remains an unknown until revealed in retrospect.
Therefore, although traders would ideally like to go on the buy when stock prices are at their absolute bottom, and only change gears to sell mode when they’ve reached their absolute peak, this is mostly impractical. Traders who buy stocks in the belief the bear market has bottomed out should not kick themselves if prices drop a bit further before turning around. Neither should sellers allow regret to gnaw at their minds when they see that traders who sold two weeks later earned more than they did. The general agreement is that you should develop your own trading strategy, which tells you when to buy and sell, and follow its dictates in a disciplined way.
Just because somebody calls an economic downturn a bear market, it doesn’t mean it’s going to share the same characteristics as some other historical bear market. For a start, we’ve already mentioned that a 20% price drop suffices to classify it as a bear market, and this could happen very quickly, on the one hand, or over a period of many months, on the other. The extent of damage inflicted by a bear market also varies a lot. For instance, the bear market of 2000-2002, which was triggered by the bursting of the tech stock “bubble”, left certain sectors still growing. By contrast, the bear market that accompanied the 2008 financial crisis left little intact in the markets at all.
You probably wouldn’t say you wished you’d never felt depressed in your entire life, and the same is true of the stock market. Its down periods are necessary because they allow for a healthy break from constant growth. In this way, we appreciate and understand the buoyant periods with all the more clarity. Bear markets bring other benefits too, like, for example, unmasking the stocks that had become overly inflated in the preceding bullish periods.
The materials contained on this document should not in any way be construed, either explicitly or implicitly, directly or indirectly, as investment advice, recommendation or suggestion of an investment strategy with respect to a financial instrument, in any manner whatsoever. Any indication of past performance or simulated past performance included in this document is not a reliable indicator of future results. For the full disclaimer click here.
Join iFOREX to get an education package and start taking advantage of market opportunities.