The term “Bulls and Bears” may not be so foreign to market watchers, traders, or investors, but what exactly does it mean, how did it come about, how do you trade during bullish and bearish markets, and what’s the difference between the two markets? Here is what you need to know:
What Is a Bear Market?
In the past few months, as the war in Ukraine, inflation, rate hikes, sanctions on China, and recession fears among a cocktail of devastating factors took a toll on economies around the world, the term “bear markets” or “bearish territory” made the headlines numerous times, but what does a bear market mean exactly?
A bear market is a term used to describe declining, weakening, or falling market conditions perhaps like those observed in the past few months. Furthermore, economic slowdowns, layoffs, and high unemployment rates are some of the factors that come into play when a bear market materializes.
Take, for example, the burn tech stocks felt from the rising inflationary heat in the past couple of months as an evident sign of a bearish market. This is because due to their dependence on future cash flows, technology stocks are generally seen as particularly vulnerable to negative market moods caused by inflation. As a result, investors tend to stay away from technology and invest in safe-haven assets instead, which are assists that are considered more “inflation-proof.” In turn, many big tech companies like Crypto giant Coinbase (COIN), EV-maker Tesla (TSLA), NVIDIA (NVDA), Microsoft (MSFT), and Intel (INTC) fell harshly and hopped on the layoffs bandwagon in order to stay afloat as their stocks plummeted, thus entering bearish territories. This is evident in chip giant NVIDIA’s share price which fell by a whopping 60% from the beginning of the year up till the time of the writing, thus ostensibly entering a bear market marked by selloffs.
What Is a Bull Market?
If a bear market could have a counterpart, a bull market would be it. So what is a bull market and what is the difference between bull and bear markets? The term bull market refers to markets that are expected to rise or are already rising during a stable economy, whereas bear markets refer to markets that have dropped or are expected to drop from their highs during a receding economy whereby most stocks decline in value.
Further, while bear markets are characterized by economic turmoil, weakening activity, and lower prices, bull markets are characterized by rising prices, and usually, investors expect the uptrend in equity prices to last for a long time in this stage of rising equity prices. Additionally, bearish markets are often associated with high employment rates and strong economic growth.
A distinct recollection of a bullish market is the S&P 500’s (USA 500) 2009-2020 bull market; the longest one in history. After falling following the 2007-2008 Global Financial Crisis (GFC), the worst worldwide global economic crisis since the Great Depression era, the S&P 500 index was able to recoup its losses by skyrocketing from below 800 points in 2009 to 3207 points up till the early 2020 COVID-19 pandemic’s stock crash.
What Is the Origin of the Term Bulls and Bears?
There are numerous hypotheses as to where this term came from, one of the most popular ones is that these terms are derived from the way bulls and bears attack. Accordingly, whereas bulls swipe their horns upwards (marking a rising market), bears swipe their claws downward (reflecting a slowing or lowering market). (Source:Investopedia)
Macroeconomic Indicators of a Bull and Bear Market
From a macroeconomic standpoint, bull markets are accompanied by higher wages, economic growth, and increased supply-demand while bear markets are characterized by inflation, higher consumer prices, and lower wages. Additionally, interest rates are usually deemed more positive in bull markets because it means investors tend to gain more money from their investments, whereas in bearish markets, some investors tend to shy away from the market and interest rates put pressure on them. GDP figures also tend to be higher in bull markets as economic demand increases rendering more sales and turnover. In contrast, bear markets come with lower GDP expectations, a decline in demand and production of goods as well as weak sales and turnover. (Source:Forbes)
Are We in a Bull or Bear Market?
It is no secret that since the beginning of the Russian invasion of Ukraine in February, the past couple of months were far from perfect for some traders and investors who might have struggled to keep pace with the rising recession fears, inflation, war, and rate hikes among other factors. Therefore, it is natural for some market watchers to say that we are indefinitely in a bear market territory and might continue to be in one for some time. However, on the other side of the coin, some analysts posit that there might be light at the end of the tunnel for the stock market soon as some market sectors may be showing signs of recovery. As such, the answer to whether or not we are in a bear market or will continue to be in one is neither black nor white. We’ll have to be patient to see how the market fares in the coming days or months in order to decide for ourselves.