Unpacked: Bull & Bear Markets

Narrator: Markets go up and markets go down. We can never know for sure where they’re heading next. Rising prices can increase risk appetite, fueling even higher price movement and creating a bull market. When conditions reverse and turn bearish, investors may be left scrambling to rebalance portfolios.

So, how exactly are these market movements defined? And how can investors navigate changing conditions? This is Bull and Bear Markets: Unpacked.

A bull market is characterized by a sustained increase in the price of a major index, from a low or moderate valuation level. Generally, an increase of 20 percent is seen as the bull market threshold for equities. A bear market is essentially the opposite, defined by a decrease of around 20 percent from a local high. A one-off peak or dip does not make a market bullish or bearish. Levels must be maintained over a period, often several months or years.

It’s also possible for individual sectors to be in a bull or bear run, while the broader market is not. For example, from October 2020 to June 2022, the S&P 500 Energy Index was in a bull market, but the S&P 500 as a whole entered a bear market in January 2022.

What factors can lead to a bull market versus a bear market? Bull markets are generally supported by economic expansion, earnings growth, positive investor sentiment, lower levels of volatility, increased investment in equity markets. One notable bull run was the dot-com bubble, which saw stock equity valuations soar from the late 1990s. Driven by tech investments, the Nasdaq rose more than 4,000 points between 1995 and 2000, before the bubble burst and equities tumbled into a bear market.

Investors will often change their strategies, depending on market direction. In the early stages of a bull market, investors might lean into riskier assets and increase exposure to cyclical stocks, which tend to move with the business cycle. Over time, as the market tops out, which means price rises are likely to slow, investors may begin to take a more defensive position. This can indicate the market is moving into bearish territory, often driven by weakening economic conditions, a slowdown in earnings growth, negative investor sentiment, higher levels of volatility, less investment in equity markets.

To date, bull markets have tended to last longer than bear markets because government policies act as a safety net, helping to prevent a poor business climate that could lead to long-term declines. One notable bear market happened in 2022 off the back of rising inflation and federal reserve rate hikes, lasting around 10 months. While U.S. corporations were pretty resilient, and the economy avoided a recession, there was a market meltdown and the S&P 500 fell 25.4 percent from its peak.

To adapt to a bear market, investors often reposition their portfolios to focus more on protection and less on growth. The market might even be driven lower by institutional investors increasing the amount of cash they have readily available, or choosing bonds over equities.

In all market conditions, it’s important for investors to protect themselves to some extent. Markets are inherently unpredictable, and unexpected events can come out of nowhere. Take the COVID-19 pandemic, which caught investors off-guard and saw equity markets in Europe and the U.S. drop by over 30 percent initially. A clear focus on fundamentals, strategic decision-making, and good portfolio diversification can help investors weather the highs and lows of bull or bear markets.

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