Bull Market vs Bear Market: What’s the Difference?
Understanding the characteristics of a bull market versus a bear market is key for investors looking to make smart decisions. This guide examines the differences between bull and bear markets, including the unique dynamics of a crypto bull run, and strategies to navigate each type successfully.
What is a Bull Market?
A bull market refers to a prolonged period where stock prices are rising. It is typically identified by a rise of 20% or more in a major market index, like the S&P 500, over at least a two-month period.
Bull markets tend to coincide with a strong economy, low unemployment, and high consumer and business confidence. Investors are optimistic and willing to invest in anticipation of future growth. Initial public offerings (IPOs) tend to increase during bull markets as well.
On average, bull markets last around 4-5 years. The longest bull market in modern history began in March 2009 and ran through February 2020, lasting nearly 11 years with the S&P 500 rising over 400% during that time.
Characteristics of a Bull Market
- Stock prices rising consistently over an extended period
- At least 20% gain from recent market lows
- Strong economic growth and low unemployment
- High consumer confidence and spending
- Increased IPO and M&A activity
- Optimistic investor sentiment
What is a Bear Market?
In contrast to a bull market, a bear market refers to a declining stock market characterized by pessimism and falling prices. It involves a drop of 20% or more from recent highs in major indexes, lasting at least two months.
Bear markets often occur alongside economic recessions and periods of high unemployment. Both consumer and investor confidence are low. Rather than investing in stocks, money flows into fixed income and other assets viewed as safer.
On average, bear markets are shorter in duration than bull markets, lasting around 1-2 years. The average decline is around 30-40%. One of the most brutal bear markets occurred during the Great Depression, lasting nearly 3 years with the Dow Jones dropping 86%.
Characteristics of a Bear Market
- Stock prices falling consistently over months
- At least 20% decline from recent highs
- Slowing economic growth, high unemployment
- Low consumer confidence and spending
- Pessimistic investor sentiment, flight to safety
- Increased market volatility and uncertainty
Key Differences Between Bull and Bear Markets
Metric | Bull Market | Bear Market |
| Duration | Average 4-5 years | Average 1-2 years |
| Magnitude | Average gain of 169% | Average loss of 30-40% |
| Economy | Strong growth, low unemployment | Slowing growth, high unemployment |
| Investor Attitudes | Optimistic, increased risk appetite | Pessimistic, preference for safety |
| IPO Activity | Increases due to optimism | Declines due to market conditions |
| Trading Volume | Heavy as investors buy equities | Lighter as investors sell equities |
Investing Strategies for Bull Markets
When stocks are consistently appreciating in value during a bull market, investors want to take advantage of the uptrend. Here are some strategies to consider:
- Buy early and hold – Investing early in a bull market and holding positions can generate substantial returns over time. Avoid trying to time exact market tops and bottoms.
- Dollar-cost average – Steadily investing fixed amounts over time ensures you don’t miss out on the bull market while also lowering your average cost basis.
- Rebalance portfolio – As stock appreciation shifts your asset allocation, rebalance back to original targets. Lock in some gains by selling overweight positions.
- Consider growth sectors – Certain sectors like technology and consumer discretionary tend to outperform in bull markets.
- Use stop-loss orders – Use stop-loss orders to protect any gains should the market turn bearish. Monitor and adjust stop levels as prices rise.
Investing Strategies for Bear Markets
Bear markets present a different set of challenges. Investors become more risk averse and concerned with capital preservation. Strategies include:
- Buy at discounts – Look for quality stocks whose valuations have fallen substantially below normal multiples. Average in over time rather than buying all at once.
- Focus on defense – Shift portfolio mix toward defensive sectors like healthcare and consumer staples which tend to hold up better in downturns.
- Dollar-cost average – Steadily investing allows you to buy more shares at low prices without worrying about timing the exact bottom.
- Hold adequate cash – Having sufficient cash reserves prevents having to sell equities at a loss to meet spending needs.
- Review stop-losses – Widening stop-loss ranges prevents being stopped out by short-term declines before a true reversal.
- Maintain long-term perspective – Bear markets eventually resolve and reverse back into bull markets over time. Avoid emotional decisions.
Conclusion
While timing bull and bear markets is difficult, investors can adjust their strategies and portfolios to take advantage of each environment as it arises. The key is having a solid long-term plan that accounts for different market cycles. Work with a financial advisor and remain disciplined to avoid emotional decisions when markets get volatile.
FAQs
How long do bull markets last on average?
Bull markets have lasted anywhere from 2 to over 10 years. The average bull market length since World War 2 has been around 4 to 5 years. The longest was the 1990s bull market lasting nearly 10 years fueled by the tech boom.
What causes a bull market?
Bull markets are generally driven by a strong, growing economy, low unemployment and interest rates, robust corporate earnings, and high consumer confidence. Investor optimism and willingness to take on more risk also propels bull markets higher.
How long do bear markets last on average?
Bear markets are typically shorter in duration than bull markets. On average they have lasted 1 to 2 years. However some extended bear markets have lasted 3 years or more, like the 2007-2009 bear market during the financial crisis.
What causes a bear market?
Bear markets are often associated with slowing economic growth, rising unemployment, high inflation or interest rates, declines in corporate profits, and low consumer and investor confidence. Broad pessimism and risk aversion cause equities to decline.
What is the average bull market gain?
According to Fidelity Investments, the average bull market has resulted in a total return of 169% for the S&P 500. Some bull markets like the 1990s tech boom have far exceeded that, while others have seen more modest 40-50% gains.
What is the average bear market decline?
Looking at history, the average bear market has resulted in declines of 30-40% in the major stock indexes like the S&P 500. However, some bear markets like in the early 1930s have seen losses approach 90% from the peak.
How should I modify my portfolio in a bull market?
In a bull market, investors might tilt their portfolio more towards stocks and growth sectors. However, it is also wise to regularly rebalance and take some profits off the table in overweighted asset classes. High valuations late in a bull market warrant caution.
How should I modify my portfolio in a bear market?
In a bear market, investors might shift more assets to fixed income, cash and defensive equity sectors. However, long-term investors should still maintain enough growth exposure to participate in an eventual recovery while also steadily dollar cost averaging into equities.
