Bull and Bear Markets: An overview

Aug 07 2022 | 2 min

As inflation reached a new 41-year record, interest rates climbed and stock prices dropped, we’re clearly in a bear market after a decade of bullish markets.EN-1Source: Bloomberg

The terms "bull" and "bear" describe whether stock markets are appreciating or depreciating in value under prevailing market conditions. Investors must understand how the direction of the market affect their investments.

What is a Bear Market?

A bear market occurs when the stock market (usually represented by the S&P 500 or the Nasdaq Composite) drops 20% or more from recent highs. It is accompanied by an economic slowdown and poor corporate performance that lead to rising unemployment as companies lay off workers.

In a bear market, pessimistic investors become wary of investing and start to sell, deepening the downward spiral. This may begin with a gradual decline or sudden plunge, followed by weeks, months or even years of stagnant or falling stock prices.

The Great Depression, for example, began with a market collapse in October 1929 and ushered a decade of bear markets.

What is a Bull Market?

A bull market occurs when stock prices rise 20% or more from their recent lows. When the market rises, economic conditions are favorable, and employment is high. This is accompanied by a sustained increase in share prices and expectations that strong results would continue for an extended period. Investors become optimistic and confident.

In a bull market, optimistic investors create strong demand for securities while the supply drops as few are willing to sell. Share prices rise as investors compete for available equity. This drives and strengthens the economy.

Bear Market vs. Bull Market

A bull or bear market is not based solely on the reaction of markets to a particular event. Long-term performance is a key component, notwithstanding short-term corrections that cause small movements.

However, not all long-term market trends can be characterized as bull or bear. A market may sometimes undergo stagnation, where a series of upward movements would be offset by downward movements, resulting in a flat market trend. When a market moves 20% or more, it would be considered either a bull or bear market.

Bull and bear markets are also categorized as “secular” and “cyclical.” A market trend that lasts a long time is called a secular trend. Smaller, short-term trends that go up or down are called cyclical.

Investing in a Bear or Bull Market

In a bull market, investors must take advantage of rising prices by buying equities early and selling them at their peak. Losses would be minor and temporary in a bull market as investors can invest more confidently with a high probability of return.

In a bear market, the probability of loss rises because prices lose value continually. Profits are made mostly in short selling or safer investments, such as fixed-income securities. Defensive stocks, in sectors like utilities where people buy regardless of economic conditions, are impacted minimally by changing market trends, and constitute a safe choice for investors.

How to Hedge Against Market Volatility?

To weather changes in economic environments, you must diversify your portfolio across asset classes, such as stocks, bonds, cash, and alternative assets. The composition of your portfolio depends on your risk tolerance, time horizon and goals, and the proper asset allocation strategy allows you to avoid the negative effects in any one asset class or investment.

Investments in long-term alternative assets that feature uncorrelated risk-reward profiles, like private equity, private real estate, private credit, structured finance and selective venture capital and hedge funds, helps to shield your portfolio from volatility.

The Family Office, a leading wealth manager in the Gulf region, uses a global network of partners and decades of experience to build diversified portfolios in private market opportunities. Contact your financial advisor to help you build a robust portfolio that preserves your family wealth for generations to come.

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