After the March 2020 stock market crash brought on by the COVID-19 pandemic, the U.S. stock market saw immense gains. In fact, the 2020 market recovery was the fastest in history, doubling from its low after just 354 trading days. However, the vicious market correction and growth stock sell-off in the first half of 2022, prompted by high inflation and increasing interest rates, had many investors thinking twice about continuing to add to the high-priced growth sector of the market.
But just as many investors sold out of their shares in 2022 in panic as losses reached 20% and more, others viewed the correction as a good time to buy and expected stock prices to begin climbing again, which they did.
Investors who believe the rally will continue are bullish — they react to their positive view of how the market will move by purchasing more stock. Those who believe the market is headed for a downfall are bearish. They react to their negative sentiment by pulling away from stocks.
Are You a Bullish Investor?
What does being bullish mean? If you have either a long- or short-term positive sentiment toward an individual stock, a stock index or the overall market, you’re bullish. For example, if you’re bullish on McDonald’s because its earnings went up in the last quarter, that means you would expect McDonald’s stock value to go up. In anticipation of this, you might even buy more shares.
When enough investors act this way, their belief becomes something of a self-fulfilling prophecy, as having more buyers than sellers pushes up the shares of any stock. When shares trade up, the market in general is said to be bullish on that stock.
Ways To Be Bullish
Even if you don’t think the stock market will do well, you can be bullish in other areas. For example, you may be bullish on gold because you anticipate the stock market will dip and inflation will rise in the coming years, making gold desirable as a store of value.
As Jim Cramer on CNBC’s “Mad Money” likes to say, “There’s always a bull market somewhere.” This means that even if the market as a whole is going down, there are always certain stocks or sectors or even alternative investments, like gold, that may be going up.
The term bullish is also commonly used to talk about individual stocks themselves. A stock can be called bullish if the sentiment toward it is generally positive or if it has been rising in value for a period of time.
Common reasons for a stock to be bullish are positive company news, merger and acquisition activity or rising earnings. You’ll sometimes hear the phrase “making bullish moves” when referring to a stock that has been climbing.
Or Are You a Bearish Investor?
In investing terms, you’re a bear if you think the value of either the total market, specific equities or certain sectors will fall. In short, it’s the opposite of being bullish. Like those who are bullish on stocks or equities, you can be equally bearish on just one stock or one security, such as a company like Amazon or a separate asset class like gold, silver or uranium.
If many people are bearish on an individual stock or the market as a whole, its value can drop. This is the opposite of what happens, of course, when many people are bullish on a stock or the stock market.
When investors are extremely bearish on a stock, they might sell it short. This is a bit of an advanced trading strategy in which investors borrow shares of stock and sell them, hoping to buy them back later at a lower price. In the case of company bankruptcy, a short seller hits the jackpot. As the shares are now worthless, the short seller never has to buy them back, meaning they keep the complete sales price as pure profit.
However, this strategy is only recommended for the most experienced of investors, as the potential losses here are theoretically infinite.
Bullish vs. Bearish Market
As with investors and stocks, a market can also be bullish or bearish. A bull market is generally defined as a period of consistent, overall upticks in the market, whereas a bear market is defined by a sustained decline in the prices of the overall market.
Defining Bull and Bear Markets
The most commonly accepted metric for determining a bear market is a 20% fall from a recent peak, but there is no universal or official measurement for a bear market. The same is true for a bull market, which is typically defined as a 20% rise over recent lows.
Regardless of the percentage price movement, however, investors generally define bull and bear markets based on general price trends and overall sentiment.
For example, a market that slowly grinds its way higher and rarely seems to have a down day is generally classified as in a bullish trend, even if it hasn’t yet reached the somewhat arbitrary target of a 20% gain to be a classically defined “bull market.” The same is true with bear markets, in which sharp rallies tend to be followed by punishing sell-offs.
Is a Bearish or Bullish Market Better?
A bullish market is better because it means the market is making gains. However, every kind of market has opportunities for profitable investing.
In terms of bullish and bearish approaches to investing, which is best depends on the investment. A bullish approach might be good for a stock that’s on the rise, whereas a bearish approach might be more suitable for a riskier investment.
Recent Market Conditions
For the past decade or so, the U.S. stock market has generally been in an amazing bull market, one that has paralleled the expansion of the U.S. economy.
However, the punishing bear markets of 2020 and 2022 interrupted that smooth, upward flow. While the recovery from the 2020 bear was remarkably quick, investors were still hoping for signs of a sustained turnaround from the brutal first half of 2022.
They got it on Oct. 13, 2022, with the start of a new bull market when the S&P 500 jumped just a day after having reached a recent low, as The Associated Press reported. However, not all analysts agree that this is actually a bull market. A CNBC poll of about 300 chief investment officers, equity strategists, portfolio managers and CNBC contributors who manage money found that just 39% believe the current market is a new bull market. Over 60% think it’s a “bear market bounce,” citing the recent loss of much of the earlier gain and the likelihood that the Federal Reserve will maintain higher interest rates for longer than previously thought.
Economic Expansion and Recessions
Although economic expansion isn’t necessarily a prerequisite for a bull market, and recessions don’t always follow bear markets, the two tend to go hand in hand. According to research from CenterPoint Securities, for example, eight of the 11 bear markets since 1948 have been followed by recessions.
However, bear and bull markets do not always last for years at a time. They can actually be mere weeks or months in length.
A bear market is also not to be confused with a correction. A correction is typically much shorter in duration and is usually defined by a 10% dip in a market index. Corrections by definition always precede bear markets, but corrections don’t always become bear markets.
Why Is It Called a Bull Market or Bear Market?
It is said that the term “bear” came first in investing and “bull” came afterward to act as a counter. Regardless of which one came first, the terms bull and bear are said to have come from the two ways the respective animals attack.
A bull will charge forward and rear its horns up, while a bear will swipe its paw down — attack directions that are parallel to investors’ anticipation of the market direction.
There have been quite a few other interpretations over the years. Researchers have had theories ranging from 18th-century bearskin trading to bear- and bull-baiting.
People who start investing during bull markets can fall victim to the fear of missing out on stock buys that were hyped by the news. Always use rational, factual judgment and not emotions when investing. Invest safely and regularly with enough diversification in your assets.
Tips for Investing in a Bear Market
Is it good to buy bearish stocks? For long-term investors, jumping into a bear market is a smart strategy that typically results in gains down the road. Although past performance is no indicator of future results, historically speaking, the stock market has always recovered from bear markets and gone on to make new all-time highs.
Although it’s painful to watch your holdings drop by double-digit percentages, investing rationally rather than emotionally can result in you picking up shares that are “on sale” and enjoying their ultimate recovery.
Just be sure to invest in the broad indexes or stocks you have personally researched, as not all individual stocks recover from bear markets. For long-term investors, bear markets are where money is actually made, as they end up picking up shares on the cheap.
Here are some tips to consider before investing during times when there is a clear bear market.
Even in a Bear Market, Not All the Sectors Are in a Free Fall
There are typically still some stocks or industries that are on the rise. If not, there are likely at least some holding steady and still paying dividends to shareholders.
Follow the Dollar-Cost Averaging Strategy
Use the dollar-cost averaging strategy instead of putting in a lump sum all at once. With DCA, you can put in smaller amounts of money at regular intervals. This ensures that your cost of investing averages out over time, as some of your money will go into the market at peaks and some will go in at dips instead. As a result, you don’t have to risk all of your investable money at once while the market continues a downward trend. This is a sensible way to invest in a bull market as well.
Buy Puts To Hedge Against Falls
If you understand options investing, buy short- and long-term puts to hedge against falls. Puts give you the right to sell your stock at a set price at the time of purchase. If the stock goes down from the time you buy a put, you would still be able to sell at the price you set earlier.
Consider Assets Outside of the Stock Market
Invest in gold, silver or bonds instead. Find an asset outside of the stock market that is still rising, staying steady or is a good store of value. It is sometimes the case that bond prices rise when the stock market is falling.
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- The Associated Press. 2023. "The S&P 500 is in a bull market. Here’s what that means and how long the bull might run."
- CNBC. 2023. "Investors see 2023 gain as a bear market bounce and expect a recession next year, CNBC survey shows."
- Seeking Alpha. 2023. "What Does Bullish Mean Regarding Stocks?"
- Seeking Alpha. 2023. "What Does Bearish Mean Regarding Stocks?"