Last Updated: March 7, 2024

Understanding the current state of the market is important to growing your money over the long term, whether you’re an investor or not. You may have heard the terms bull or bullish and bear or bearish in reference to the stock market and economy, but do you know what that means?

What’s the Difference Between a Bear vs. Bull Market?

To understand the differences between bear and bull markets, it’s important to understand what is happening economically in five key areas: 1) stock market performance, 2) gross domestic product (GDP), 3) the unemployment rate, 4) the inflation rate, and 5) interest rates.

At their most basic level, the terms bear and bull reflect the trend line of the stock market prices and market indexes. A bull market is an upward trending line (though slight short-term dips are not uncommon), while a bear market is a downward trending line. Digging deeper, a bull market means the economy is experiencing growth and the stock market (e.g., share prices) is increasing in value—formally, an increase of a minimum of 20% since the last market downturn. Generally, investor confidence and employment levels are high, and the economy is strong. Employment levels are also usually high, enabling greater consumer spending.

A bear market begins when stock prices broadly decline by at least 20% over a minimum of two months, causing an economic downturn. Employees may lose their jobs, causing unemployment levels to rise, and gross domestic product (GDP) and stock market prices will decline. Investors are generally more pessimistic/less confident about the economy.

When looked at holistically, the stock market has trended positively over the long term, but bear markets pop up from time to time. Think the 2008 housing market crash and recession, where the Dow Jones Industrial Average dropped more than 50% over the course of 18 months. Bear markets rarely last as long as bull markets, but stocks lose an average of 36% in bear markets, according to Ned Davis Research via Hartford Funds. Short-term market corrections (i.e., fluctuations) generally don’t last long enough to actually swing the market’s nature.

Bull and bear markets are largely influenced by investor attitudes. Investors tend to buy and hold stocks during bull markets in hopes that the prices will continue to rise, thus influencing market conditions. Bear markets are more volatile and riskier to invest in, and investors may withdraw their money from the market and sit on cash until the market begins to rise again. This can further impact stock prices, causing them to drop even lower.

Characteristics of Bull and Bear Markets

Economic Changes

The stock market, business performance, and the overall economy are strongly linked. According to the Consumer Finance Institute, “In a bull market, corporate earnings increase, and the economy grows as consumers tend to spend more due to the wealth effect. Trading and IPO activity also increases during the bull run.” In a bear market, consumers tend to restrict or reduce spending, thus reducing corporate profits. This affects companies’ stock values and negatively impacts GDP.

Uncontrollable events like natural disasters, wars, or a pandemic can have very significant impacts on the overall economy, including the stock market. These can also cause the government to issue stimulus or other recovery packages, further driving the market up or down.

Supply and Demand

The supply of and demand for securities have an impact on the market’s condition. In a bull market, there is a stronger demand for a weak supply of securities (i.e., more people are looking to buy securities than those looking to sell their securities). This can cause share prices to rise. In a bear market, the securities demand is much lower than the supply (i.e., there is an excess of securities for sale), generally resulting in a drop in share prices.

Inflation

When the economy is strong, inflation can enter the picture and become a problem. High demand for goods can cause inflation to rise in bull markets; conversely, shrinking demand (from lower consumer spending) in a bear market can price deflation.

Interest Rates

Low interest rates are often associated with bull markets, which encourages spending—both by consumers and businesses. Low interest rates make growth and expansion more affordable. High interest rates typically accompany bear markets, making borrowing money more expensive. This can limit companies’ ability and desire to invest back into their expansion and growth.

Investor Psychology

We’ve discussed above how investors’ psychology and the stock markets are linked. Investor confidence is higher in a bull market, which may lead them to put more money into the market. In a bear market, investors’ attitudes are more negative, and they may move their money out of the market into less risky investments to avoid a greater loss.

What to Do in Bear and Bull Markets

In general, how you invest depends on a variety of factors, including your risk tolerance, time horizon for your investments, and financial situation—among so many others. Making broad prescriptions for how you should invest your money is not in the scope of this blog post. Consult a financial professional regarding your specific situation and strategy.

However, we can make some generalizations about market performance and what investors typically do with their portfolios in each market. According to The Motley Fool, “Growth stocks in bull markets tend to perform well, while value stocks are usually better buys in bear markets. Value stocks are generally less popular in bull markets based on the perception that, when the economy is growing, ‘undervalued’ stocks must be cheap for a reason.” Diversifying your investments between different stocks in different industries and spreading your investments out between the stock market and other less risky investments, like bonds, can be a good way to hedge against big swings in the market’s value and bearish markets in general. Read our article on diversification here. Additionally, diversifying your portfolio further with real estate and commodities can be a smart choice.

In a high-value bull market, having a higher allocation of your investments in stocks may allow you to yield greater returns. Many investors take advantage of rising stock prices by buying early (ideally, when it’s apparent the market is on an upward bullish trend) and holding them until around their peak, then selling them at a price higher than when you purchased the stock. Knee-jerk market movements in an overall bull market may be minor or short-lived, so staying invested will typically lead you to recoup losses you experience.

The chance of loss is greater in a bull market because overall stock prices are trending downward over a longer time. A successful strategy to combat losses in a bull market is something we advise you work out with a fiduciary financial professional, as it can involve more complex tactics and a deeper view of the economics of the stock market and economy. However, according to Forbes, “During a bear market, many investors may want to sell their investments to protect their money, get access to cash or move their holdings to more conservative securities, which can have the unintended side effect of creating a sell-off, which makes stock prices fall even lower. It may also cause investors to sell their investments for less than they paid for them, which can hinder their abilities to reach their financial goals long term.”

Remember, gauging the current state of the market goes beyond looking at short-term market reactions—you need a long-term view of market performance to fully understand if we’re currently in a bear or bull market. No matter the market’s condition, a bear or bull market can have a significant impact on your investments and overall financial situation, and past performance does not guarantee future results. No one can predict when or for how long the market will move in one direction or the other or when market corrections will occur. Bear markets are an inevitable reality of investing and do not always lead to a recession, so keeping your emotions in check is a crucial aspect of managing your investment strategy.

If you’re retired, preserving your nest egg becomes vitally important. This often means shifting your allocation from a riskier heavy investment in the stock market to a more conservative one, with cash, bonds, or other fixed-income investments. This can cause an unintended effect, though: You often trade greater returns for safer investments, which may mean your portfolio can’t keep up with your withdrawals in retirement. The end result—you run out of money. Again, work with a financial professional to determine the allocation and strategy that’s right for you. They can often model potential returns and losses in your portfolio according to a variety of allocations and help you map out your monthly/annual withdrawals to preserve your income—and maybe experience a little growth, too.

Selling to get out of the market during a downturn can be a critical mistake that some emotional investors make; most financial professionals advise staying invested in the market to some degree for the long term, even if we’re in the midst of a bear market. Once you get out, it can be hard to get back in and recoup any losses you experienced. Citizens Bank states, “Over time, the best strategy for managing market changes has been through long-term strategic asset allocation. Working with a financial advisor to create a diversified investment portfolio can help you weather challenging markets, avoid the near-impossible task of timing the market, and make rational — not emotional — investment decisions.”

---

If you want to learn about more personalized and advanced strategies, schedule a 15-minute call with our team.

Schedule Your Complimentary 15-Minute Call

Want expert retirement and investing advice? Subscribe to our YouTube channel and check out our weekly podcast with The Sandman!

Listen to Protect Your Assets anywhere you get your podcasts:

---

Standard Disclosure

This blog expresses the author’s views as of the date indicated, are subject to change without notice, and may not be updated.  The information contained within is believed to be from reliable sources.  However, its accurateness, completeness, and the opinions based thereon by the author are not guaranteed – no responsibility is assumed for omissions or errors.  This blog aims to expose you to ideas and financial vehicles that may help you work towards your financial goals. No promises or guarantees are made that you will accomplish such goals. Past performance is no guarantee of future results, and any expected returns or hypothetical projections may not reflect actual future performance or outcomes. All investments involve risk and may lose money. Nothing in this document should be construed as investment, tax, financial, accounting, or legal advice. Each prospective investor must evaluate and investigate any investments considered or any investment strategies or recommendations described herein (including the risks and merits thereof), seek professional advice for their particular circumstances, and inform themselves about the tax or other consequences of any investments or services considered.  Investment advisory services are offered through Liberty Wealth Management, LLC (“LWM”), DBA Liberty Group, an SEC-registered investment adviser.  For additional information on LWM or its investment professionals, please visit www.adviserinfo.sec.gov  or contact us directly at 411 30^th Street, 2^nd Floor, Oakland, CA  94609, T: 510-658-1880, F: 510-658-1886,  www.libertygroupllc.com. Registration with the U.S. Securities and Exchange Commission or any state securities authority does not imply a certain level of skill or training.

---

References

Amadeo, Kimberly. (January 28, 2022). The Stock Market Crash of 2008. The Balance. https://www.thebalance.com/stock-market-crash-of-2008-3305535

Corporate Finance Institute. (n.d.) Bull vs Bear. https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/bull-vs-bear/

Gallagher, Gina. (n.d.) Worried About a Recession? Heed the Lessons from Bulls and Bears. Citizens Bank. https://www.citizensbank.com/learning/bull-market-vs-bear-market.aspx

Hartford Funds. (n.d.) 10 Things You Should Know About Bear Markets. https://www.hartfordfunds.com/practice-management/client-conversations/bear-markets.html

Jackson, Anna-Louise. (January 3, 2022). 2021 Stock Market Year In Review. Forbes Advisor. https://www.forbes.com/advisor/investing/stock-market-year-in-review-2021/#:~:text=It%20was%20a%20wild%20year,the%20Nasdaq%20Composite%20gained%2021.4%25.

Kramer, Leslie. (May 31, 2021). An Overview of Bull and Bear Markets. Investopedia. https://www.investopedia.com/insights/digging-deeper-bull-and-bear-markets/

Lam, Jackie. (December 10, 2021). How Investors Should React to Bull and Bear Markets: Set It and Forget It. Time. https://time.com/nextadvisor/investing/bull-bear-markets-explained/

Price, Mike. (December 10, 2021). Bull vs. Bear Markets: What’s the Difference? The Motley Fool. https://www.fool.com/investing/how-to-invest/bull-vs-bear-market/#:~:text=A%20bull%20market%20is%20occurring,when%20the%20economy%20is%20shrinking.

Tretina, Kat. (April 2, 2021). Bear Market And Bull Market: What’s The Difference? Forbes Advisor. https://www.forbes.com/advisor/investing/bear-market-vs-bull-market/