Investing 101: Bull and Bear

No, it's not a typo! While many will have read the title of this article and immediately thought of the popular high-street fashion brand, Pull and Bear, this post will not be discussing the clothing company's business model, or their history marred by ethical controversy - a classic case of a fast-fashion company employing cheap, child labour in Bangladesh, India, and China. Rather, on a lighter note, this article will cover two of the most frequently used terms that refer to the state of financial markets - bull and bear.

What is a 'bull' market?

A bull market occurs when prices of stocks, commodities, and alternative investments are rising, or expected to rise. Generally speaking, a bull market is characterised by optimism, aggressive investors buying stocks, and a positive future outlook. They tend to be supported by economic growth or a strong economic backdrop, and little unemployment. A bull market can last for a couple of months or even years.

How do I know when the market is 'bullish'?

Prices of stocks and shares rise and fall every day. Therefore, it can be difficult to know when a market is bullish, or when it is just subject to natural demand and supply changes that occur on a daily basis. Having said this, a bull market is generally defined as one in which stock prices increase by about 20%, particularly after a fall of about the same magnitude.

In the current economic climate, it can be said that the markets are seeing a bull run. Share prices are recovering and rallying since their lows in March due to Covid-19 pessimism. However, investors should be wary that, at some point, this bubble will burst. The most likely threat is the potential of a second spike in coronavirus cases.

What are some historical examples of a bull market?

  1. Everyone should know the story of the Wall Street Crash and the Great Depression in the late 1920s by now. However, what followed after such a devastating time for millions globally was a great bull run in the U.S. stock market. From June 1932, the S&P 500 index rose about 325% over the course of the following 5 years - a remarkable run produced immediately after one of the greatest financial disasters in history.

  2. The Go-Go Years: Just over two years long, the Go-Go years (1966-68) constituted the shortest bull market in modern U.S. history. The S&P 500 soared some 48% in that short period of time. Extremely low unemployment in a robust job market reinforced this general optimism. However, this all came crashing down in 1968. Political and social turbulence, including the assassinations of Martin Luther King Jr and Robert Kennedy, high inflation, and further setbacks in the Vietnam War, led to a recession.

  3. Mid-2000's Housing Bubble: As with every bubble and boom, the housing-led bull market burst, creating the financial crisis. Low interest rates and subprime mortgages encouraged more and more Americans to buy houses. People with a poor credit score were offered loans by banks that they simply could not afford. House prices continued to rise at an unsustainable rate, and the bull market inevitably turned into a great recession. The Dow Jones Industrial Average fell by 778% on September 29th, 2008.

There's a noticeable pattern to the above bull market runs, as with other examples. After a period of economic weakness and precariousness, bull markets tend to emerge, bringing with them high levels of optimism, consumer spending, economic growth, and share price increases. However, the bull run inevitably reaches a level where it can no longer be supported or sustained, and falls into a recession or a 'bear' market.

And what about a 'bear' market?

Quite simply, a bear market is the opposite of a bull market. A wider gloomy economic backdrop causes pessimism among investors, which leads to a mass sell-off of shares. If unemployment is high, or disposable income is low, the future outlook is generally inauspicious, which in turn may have negative consequences for businesses. As a result, investors sell their shares, as they are less optimistic, and this spirals into a bear market.

Why are markets called 'bull' and 'bear' markets?

There are several theories regarding the labelling of these market conditions. One dates back to a 16th-century proverb in which people would "sell the bear skin before one has caught the bear." However, my personal favourite is the idea that the terms refer to the way in which the two animals attack their prey.

When a bull mounts an attack on its opponent, it raises its horns in the air (pointing upwards), while a bear will tend to swipe down at its rival. Whether this is just a nice metaphor or not, it works for me!

What do investors tend to do in each market condition?

In a bull market, prices are rising, and so it is best to catch the wave as early as possible when investing in a particular company, real estate property, currency, or commodity, and then sell when it is believed to have reached its peak. In a more bearish market, prices are constantly falling, so, generally speaking, it is not the optimal time to invest. However, when prices fall, sometimes they are pushed so low that they do not fairly represent their true value as a company, and an investor may be able to grab a bargain at a low price. During the worst of the coronavirus-led recession in March 2020, there were many cases in which shares became undervalued by the market, and investors capitalised on this opportunity with great success.

An investor in a bear market may also look at investing in more defensive stocks. When market conditions are turbulent, it can be a safe idea to invest in companies whose performances are only minimally affected by changing trends in the market. Utility companies tend to do well in such conditions, as regardless of a bullish or bearish market, people will always need water, wifi, electricity, and gas.