Bear market vs bull market: what are they, what is the difference and how should you invest in both cases?
Major indices on Wall Street are entering bear territory, after years in a bull market. How this change will impact your investments.
Since President Trump announced that he was serious about his intention to impose sweeping tariffs on some of the country’s key trading partners, markets have wobbled. However, since his announcement last Thursday, detailing which countries would be hit, investors on Wall Street have been on a selling spree.
Many commentators and economists are now talking about the possibility of a ‘bear market’ emerging, after years in bull territory. What does this mean?
As the fallout from President Trump’s tariffs and the retaliatory actions taken by other governments continue, the terms bull and bear are likely to be used, as 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.
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 high.
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.
Last week, the NASDAQ index, reported that it had entered a bear market in February, when it reached its recent high, and subsequently fell by 22 percent, as of Friday, April 3. The index ticked up ever so slightly on Monday, inching up just under 100 points. On Monday, the NASDAQ was joined by the S&P500 which entered bear territory.
This is truly unusual.
— unusual_whales (@unusual_whales) April 7, 2025
Today, the S&P500 added $3 trillion off a rumor unconfirmed that they were considering a 90-day pause on tariffs.
Then, the White House confirmed this wasn't true.
The S&P500 lost $2.5 trillion 5 minutes later. pic.twitter.com/ez47DdE3z2
What typically happens in a bear market?
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.
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