- 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. But what do these terms actually mean, and why do they matter?
Typically, a bull market involves a rising market, often marked by a 20%+ gain for major stock market indexes like the Dow Jones Industrial Average or the S&P 500 over their recent lows. A bear market is the opposite, involving a 20%+ loss.
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. That said, savvy investors can make money in both environments.
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Characteristics of a bear market
A bear market generally means a downward-trending market, with key characteristics such as the following:
Price decline
Although definitions can vary, a bear market is typically considered to happen after an extended period of time when major stock market indexes fall to at least 20% compared to their most recent highs.
Negative investor sentiment
A bear market usually isn't limited to technical factors like price changes. It also tends to be marked by negative investor sentiment, where investors are typically fearful and pessimistic about the state of the market and overall economy.
Negative economic indicators
Although bear market trends can occur during relatively strong periods for the economy, such as if the downturn has more to do with conditions isolated within the financial system, in many cases there's an overlap between a market downturn and an economic downturn.
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.
"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.
Negative market behavior
When investor sentiment and economic indicators are down, that typically translates into negative market behavior, like increased selling pressure and volatility, along with challenging fundamentals like declining company earnings. In many cases, a bear market is an environment where market behavior drags down the vast majority of stocks, even ones with strong fundamentals.
Characteristics of a bull market
A bull market is generally the opposite of a bear market, with key characteristics such as:
Price increases
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, driving prices up.
Positive investor sentiment
With investors feeling optimistic about the stock market during a bull run, that often leads to an environment of a rising tide lifting all boats.
"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 and executive managing partner at Practice Management Consultants, LLC.
Positive economic indicators
The stock market gains in a bull market are often underpinned by strong economic indicators.
"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. Gross domestic product increases as consumers increase spending and unemployment rates decline.
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, which is typically good for stock values.
Positive market behavior
In contrast to bear markets where selling pressure is high, market behavior during a bull run tends to involve lots of upward pressure on stocks due to intense buying demand. A sustained bull run can also avoid volatility in terms of prices bouncing up and down, as instead they just trend up.
As the overall demand for stocks and similar assets increases, companies usually get higher valuations, which can also lead to more initial public offerings (IPOs).
Key differences between bear and bull markets
The easiest way to separate bear and bull markets is to think of bear markets as falling and bull markets are rising. More specifically, the key differences include:
Price trends
- Bear market: Downward price trends for most securities
- Bull market: Upward price trends for most securities
Investor sentiment
- Bear market: Usually marked by pessimism and fear
- Bull market: Usually marked by optimism and confidence
Economic conditions
- Bear market: Usually involves a recession or economic slowdown
- Bull market: Usually occurs during a period of economic growth
Market behavior
- Bear market: Usually involves increased selling demand and higher volatility
- Bull market: Usually involves increased buying demand and lower volatility
Investing strategies for bear markets
Although a bear market can cause stock prices to fall, there are ways to limit the downside and even make money in a bear market.
Some strategies include:
Long-term investing
Taking a long-term approach can help you avoid the worst of a bear market. You might not enjoy seeing stock prices fall, but if you don't sell, those losses are just on paper. Over the long run, if prices rebound during the next bull market, then that downturn essentially didn't hurt you. It might have limited overall gains, but over the long run, you're likely to live through both bull and bear markets, and the market still tends to trend upward.
Consider how the average bear market lasts 11.1 months with an average cumulative loss of -31.7% vs. the average bull market lasting 4.3 years with cumulative average gains of 149.2%, according to First Trust Advisors. In other words, if you can wait out bear markets, historically you would have been rewarded with larger and longer bull markets.
Defensive stocks
If you want to take a more advanced approach of altering your investments during a bear market or if you think one is likely to occur, you might turn to so-called defensive stocks which are considered to be less affected by economic downturns. For example, some utilities and consumer staples still have consistent returns during bear markets. But keep in mind that you don't know when or for how long a bear market will occur, so you might miss out on further gains if you adjust your portfolio too much.
Value investing
Similar to the logic of investing in defensive stocks, choosing value stocks over growth stocks in a bear market might work out better. That's because value companies may be more profitable and less reliant on economic expansions, whereas growth stocks can only support their high valuations if revenue and earnings are quickly growing.
Shorting
Shorting stocks essentially means you're betting on the price going down, which can work to your advantage in a bear market. However, the risks are higher because the potential losses are unlimited — the more the stock gains, the more you can lose.
Dollar-cost averaging
Continuing to invest, even during a bear market, can help you bring your average cost of investment down. That means that if/when there's an upswing, you can enjoy even higher gains than if you stopped investing on the way down.
Consider diversification
By investing in a wide range of assets, particularly across different asset classes, you may be able to reduce risk and volatility. For example, during a bear market, stock prices might fall faster than bond prices, and while not guaranteed, owning both could limit the downside.
Consult a financial advisor
Bear markets can be tricky and scary, so it can help to seek professional guidance. A financial advisor might simply reassure you that everything will be okay, and if that enables you to stay invested for the long term, rather than locking in losses by panic selling, that could make a positive impact on your long-term returns.
Investing strategies for bull markets
During bull markets, the general trend is that the stock market as a whole rises, so it's often easy for any investment you choose to gain value. However, some types of investments tend to perform better than others during bull markets.
Here too, though, you might not want to alter your strategy too much to try to time the market, as that can be very difficult. That said, advanced investors often take approaches such as the following to try to get above-average returns:
Growth stocks
Growth stocks are companies that typically have high growth potential and may have a high price-to-earnings ratio to account for that future expected growth. Bull markets can be favorable to growth stocks, as strong investor demand and economic conditions can help sustain the rapid pace of growth these stocks rely on.
Technology and innovation stocks
Many tech and innovation-oriented stocks tend to be growth stocks, and these sectors can benefit from bull markets where it's easier to raise capital and invest in long-term growth rather than trying to stick to tighter budgets during a downturn.
Stay invested
One way to profit from bull markets without trying to time the market is to simply stay invested and ride the bull market wave up. By investing for the long term, you can potentially take advantage of the fact that bull markets tend to outlast and outgain bear markets.
Rebalance your portfolio
While you don't necessarily want to take money out of the market during a bull run, you can make some tweaks to potentially eke out even more gains. One approach is to rebalance your portfolio, which really can occur in any market and often happens on more of a periodic basis, such as once per year. Doing so resets your asset allocation to your desired levels and essentially helps you buy low and sell high.
Which is better to invest in: Bull vs. bear market?
In general, if you had to choose one, 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. However, investing in any market, whether bull or bear, and taking a long-term approach can help you enjoy gains over the long run.
"The markets can be very volatile in the short term," says Nwasike. "It's important to have a long-term perspective."
Even during a bear market, continuing to invest can be beneficial, because when other investors become pessimistic and avoid buying shares, prices will drop, making buying appealing. There may be more short-term risk, but depending on your financial plan, it may be worth investing in.
A bear market can be a good time to invest "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 unsure of your next moves, the best financial advisors can help you make smart investment decisions during bull and bear markets 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.
FAQs about bear markets vs. bull markets
How long do bear markets typically last?
Bear markets typically last a little less than one year, according to First Trust Advisors. However, it's hard to predict exactly how long any future bear markets will last.
Can I still make money in a bear market?
Yes, you can still make money in a bear market, such as by investing in defensive stocks that typically perform well in any environment, or taking riskier approaches like shorting stocks.
How can I protect my investments during a market downturn?
There are several possible ways to protect your investments during a market downturn, such as by diversifying your investments, dollar-cost averaging, and potentially turning to certain types of assets like value stocks. Speaking with a financial advisor can help you determine the best investing strategies for your situation.
