Bear market vs bull market: what are they, what is the difference and how should you invest in both cases?
Understanding the difference between a bull and bear market, as investors on Wall Street selloff stocks at an historic pace.
In recent years, home investing has become an increasingly common pursuit, spurred in part by the growth of cryptocurrency trading during the pandemic. With some of these digital assets seeing a major rise in value, some investors flushed with cash looked to a more reliable place for their earnings. However, as housing prices have increased, sparked by higher interest rates, other stocks have appeared to investors, primarily those in the technology sector focused on advancements in AI.
Some of the focus on technology companies over the last decade has contributed to interest in cryptocurrency, and today, both sectors are taking a beating as Wall Street begins a major selloff of stocks, sending the prices plummeting.
As the fallout from the global economic turmoil continues, you might hear the terms ‘bull’ and ‘bear’ being used to describe the market. These two animals symbolize different economic trends, specifically whether a market is appreciating or depreciating in value.
What is a bull market and how should you invest?
A bull market occurs when a market is on the rise with favorable conditions that allow the value of the stock, currency, or commodity being traded to increase. This market is characterized by a sustained increase in price, like a rise in a company’s share price. Until today, most investors would have described the US stock market as a bull market, with prices continuing to reach new highest within short time periods.
When this is the case across the board, the country’s economy is typically in a good position with broad confidence that prices will continue to rise. Employment levels are often high, with a flow of money entering the economy sustaining the price rises and spurring more growth.
When this is the case, investors are generally advised to take advantage of price rises by buying up stocks early to ride the rise and then selling for a profit. During a bull market, even unsuccessful investments should represent only fairly minor losses. They may even be temporary as the average price of all goods and services rises across the board.
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What is a bear market and how should you invest?
In stark contrast to the upward trajectory of a bull market, a bear market involved a widespread decline in the value of assets. Often, the benchmark of a 20% fall is used to define a true bear market in relation to its recent hills.
In a bear market, the value of shares continuously drops for a prolonged period of time, creating the belief that prices will continue to fall. This encourages investors to look for a quick sale to avoid their assets being further devalued in the future. Currently, there is not enough data to show whether what is being seen will continue, and the Nasdaq, Dow Jones, and S&P500 are all up compared to their position a year ago.
This can cause a downward spiral of price drops, which can slow the economy and worsen conditions for workers. In some cases, companies are forced to lay off workers to guard themselves against bad economic trends, pushing up unemployment.
While bull markets breed confidence, bear markets foster a belief that things will continue to get worse and that the likelihood of securing a return on your investment is far less. However, products like fixed-income securities can shield investors from the worst of the bear market’s influence and offer a safe haven for funds.
Time will tell whether today’s events are a blip, meaning a temporary price adjustment downwards to align the price of stocks with what investors see as their value and potential, or a trend that reflects a structural problem in the US economy that could plunge the country into a recession. But over the next week, as more data is collected investors are likely to proceed with caution.