Bear versus Bull Market

With all the ups and downs of the stock market this past year, inflation, and speculation of market trends, it seems like a good time to ask the question: What do the bear and bull have to do with the stock market?

The bear market phenomenon is thought to get its name from the way in which a bear attacks its prey—swiping its paws downward. This is why markets with falling stock prices are called bear markets. Just like the bear market, the bull market may be named after the way in which the bull attacks by thrusting its horns up into the air.

By most accounts, we are in a bear market. But what does that mean?

Bear market defined

The Securities and Exchange Control Commission defines a bear market as a period of at least two months when a broad market – measured by an index such as the S&P 500 – falls by 20 percent or more. Analysts consider the S&P 500 the barometer of the overall market’s health because it consists of the 500 largest companies by float adjusted market cap. The S&P 500 entered a bear market on June 13, 2022, after closing more than 20 percent from the all-time high on January 3, 2022. The most recent (and shortest) bear market for the S&P 500 ran from February19, 2020 through March 23, 2020, when the index fell 34 percent as investors responded to COVID19 lockdowns. Other examples of bear markets include The Great Depression, the dot com crash of 2002, and the housing crisis of 2007-2008.

What causes a bear market?

A bear market happens when an incident undermines investor confidence. This causes investors to sell their stock, which lowers the price per share. As prices drop, investors continue to lose confidence, which prompts more selling, driving the prices down further.

What are the characteristics of a bear market?

Bear markets are characterized by negative investor sentiment, economic slowdown, and higher unemployment rates. Investors are risk-adverse in a bear market and prefer to invest in fixed-income securities or cash. A bear market will last while investors shun speculative investments and until they are ready to take greater risks. A bear market may signal an approaching recession, though it is not always a correlation.

How long does a bear market last?

Of all the bear markets for U.S. stocks since 1928 (there have been 26), the average bear market lasted 289 days, with a decline of about 36 percent. However, some of these downturns lasted for only a few months while others dragged on for roughly two full years.

A bull market

A bull market occurs when investment prices rise for a sustained period amid investor confidence. Typically, stock prices rise by 20 percent after two declines of 20 percent each. Bull markets are characterized by optimism, thriving economies, and low unemployment, which create a buyer’s market. A strong production economy, high employment, and rising GDP all suggest profits will continue to grow, and this is reflected in rising stock prices. Low interest rates and low corporate tax rates are also positive for corporate profitability.

Since 1928, there have been 27 bull markets, with one of the longest running from 2009 – 2019. The average bull market lasts for 991 days, or 2.7 years.

At least one opinion contends that a new bull market has begun, marked in part by a 50% retracement level from the S&P’s low in June, a marked improvement in breadth, and the percentage of stocks at new highs.

Regardless of the type of market we are in, you should always invest cautiously.

Analysists estimate that the average person has a 50-year investment horizon and can therefore expect to live through approximately 14 bear markets. Although it can be difficult to watch your portfolio dip with the market, downturns are a temporary part of the process. And, while bear markets can deplete your savings and cause anxiety and stress, they serve to devalue overly inflated investments. Fortunately, markets are positive more than negative. Of the last 92 years of market history, bear markets have comprised only about 20.6 of those years. While the saying goes that nothing is certain except death and taxes, it can be argued that a bull market following a bear market is also a certainty.

How we can help

If you believe your stock has recently declined for a reason unrelated to the normal risks associated with investing in the stock market, Robbins LLP can evaluate the company’s performance and investigate whether the company is being impacted by corporate malfeasance. 

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