At the most basic level, a bear market describes times when stock prices fall, and a bull market is when they’re going up. While this may make the two seem like mirror images, bull and bear markets are not simply the same phenomenon in reverse.
Here’s what you need to know about bull and bear markets, including key differences between them.
What is a bear market?
A bear market is when a stock market index falls by at least 20% from recent highs. (Reminder: A stock market index is a group of stocks investors watch to gauge how the market is doing. Think: The Dow Jones Industrial Average, the Nasdaq Composite, the S&P 500®, or the Russell 2000.)
What is a bull market?
A bull market, meanwhile, marks a period of rising market index values. Bull markets lack the same concrete definition of bears: You may see some sources, for example, saying a bull market is a 20% increase from recent lows, while others do not provide an exact threshold. What’s important to keep in mind is that they signify upward trending stock prices.
Bull market vs. bear market: Similarities and differences
How long bull and bear markets last
Bull markets tend to last longer than bear markets, in part because stock prices tend to trend upward over time.
There have been 26 bear markets and 26 bull markets since 1872. Bear markets lasted a median of 19 months (less than 2 years) with a median drop of -33% and durations ranging from 1 month to 113 months (nearly 9.5 years). Bull markets lasted a median of 42 months (3.5 years) with a median spike of 87% and durations ranging from 14 months to 98 months (about 8 years).1
In other words, bull markets historically have lasted a median of twice as long as bear markets—and have seen prices rise more than double what they have tended to fall in bear markets.
How bear and bull markets affect investor behavior
Because prices are trending upward, bull markets typically reflect an overall sense of optimism and confidence in the stock market. More people tend to invest in the market during bull periods to potentially profit. That increased demand for securities increases their price, which can then spur more even demand as even more people want in, sending stock prices—and gains—higher.
Meanwhile, bear markets reflect pessimism and uncertainty. As prices fall, fewer people invest and more people sell off, unwilling to risk losing money as no one knows how low the market will go. With less demand, stock prices decrease even more, which can create the same type of recursive cycle downward that bull markets do upward.
How bears and bulls relate to the economy
First things first: It’s important to note that the stock market is not the same as the economy. The stock market is where buyers and sellers can trade shares of publicly traded companies and indicates how those companies are performing now and how investors believe they may perform in the future. The economy, meanwhile, represents a country’s output and consumption of goods and services by people, businesses, and the government. While these two things certainly affect each other, stock prices can trend upward while economic output slows—and vice versa.
That being said, a robust economy—one with low unemployment, increasing wages, healthy levels of consumer spending and production, and moderate inflation—tends to coincide with a bull market. But it’s difficult to determine if the economic benefits are the reason for or the result of the bull market. A good economy can drive investments in the stock market, which in turn can boost the economy.
There’s a similarly circular relationship between a down economy and a bear market. When unemployment rises and consumer spending falls, companies may seem less attractive to investors, which may lead stock prices to fall into bear market territory. But again, it’s not easy to claim the economic downturn poked the bear market or the bear market spurred the economic slowdown. Though recessions and bear markets are often associated with one another, in about a quarter of bear markets, recessions haven’t happened.2
How to invest during a bear market vs. bull market
There are both risk and potential opportunities in bear and bull markets. Having a sound investment plan and staying the course can let cooler heads prevail in up and down times. Here are tips to creating a sound investment plan:
Take emotion out of it
Both bears and bulls can affect your judgment. Bear markets might make investors feel skittish. Seeing the value of your portfolio go down can induce anxiety, and investors can panic-sell at the bottom, sometimes just before a recovery. Make sure your decisions during bear markets are based on your understanding of your investments rather than on your fear that they will never recover. Historically, the overall US stock market has eventually recovered. Until you sell, your losses (and gains) are on paper only.
Bull markets, on the other hand, can trigger a sense of euphoria as you see stock prices surge. But rushing to invest in something simply because it seems to be “doing well” is not a thoughtful strategy for wealth building. You may not know the financials of companies you’re buying or you may purchase stock close to its peak.
Don’t try to time the market
No one can predict when the market will rise or fall—regardless, people still try to time the market. Consider the following instead:
- Dollar-cost average: With this strategy, you consistently invest the same amount at periodic intervals regardless of which direction the market or a particular investment is going. This can serve as a risk management trading strategy if you end up buying more when the price is relatively lower and buying less when the price is relatively higher. Over time, this may help you pay less per share overall. For this strategy to be effective, you must continue to purchase shares both in market ups and downs.
- Diversify: Investing broadly across multiple asset classes, such as stocks, bonds, and short-term investments can spread out risk and reward. When the market is trending upward, your investments in more volatile assets could potentially grow. When it’s trending downward, your investments in more conservative assets could provide stability. Together, they could help your portfolio grow steadily over time. It is important to remember, dollar cost averaging and diversification do not ensure a profit or protect against loss in declining markets.
- Rebalance periodically: Your asset allocation should reflect your goals, investing timeline, and risk tolerance. But deciding how you’ll divide up your investments across different types of assets isn’t a one-and-done task. As the market moves up or down over time, your allocation may fall out of balance. Rebalancing could help make sure your investments aren’t overweighted in one area and underweighted in another. This can help keep your portfolio from becoming too aggressive when stock prices are rising, which may open you up to greater losses if the tides change. Likewise, it helps prevents your holdings from growing too conservative when things are down, positioning you to still benefit from lower-priced stocks recovering. But it is important to remember to regularly revisit your contributions as part of an overall financial review, in case you need to adjust your contributions now and again in the future to stay on track for your plan.
If you need additional help, you may want to consult with a financial professional for your situation.
Taming the bull and the bear
Big market swings in either direction can feel overwhelming, especially when you see the effect they have on your money. But crafting and adhering to a clear long-term investment strategy could help you ride out whichever way the market’s going.