Difference Between Bull and Bear Market
Bull market refers to optimistic movement in stock market which means share prices rise, there is downfall in unemployment and economy is good whereas bear market refers to pessimistic movement in market which indicates that share price is falling, there is high unemployment and recession is approaching which means bull market is opposite to bear market.
The stock market of any country in the world is like a heartbeat which is volatile throughout depending on various circumstances. The market will thus go either up or down which in financial terms is referred to as a ‘Bull Market’ when the general market scenario is upbeat and the stock market is rising. On the other hand, if the market is moving downwards, it is referred to as a ‘Bear Market’. The terminologies are applicable from the way in each of these animals attack their opponents. In respective scenarios, the bull will thrust its horns in the air whereas a bear will stamp its paws down on its prey.
A bull market is when the economy is very smooth, the GDP of the economy is rising and job creation is also on the rise. The selection of stocks is easier in such a scenario as the overall health is stable. If an investor is optimistic then they are said to have a ‘bullish outlook’.
A bear market is the opposite and the economy is under a recessionary phase over a long period of time and stock prices are plummeting rapidly. Stock selection becomes very difficult and investors focus on making money by selling stocks (short selling). Though one with a pessimistic opinion is called someone with a ‘bearish outlook’, many anticipate such a situation to be temporary and indications of the revival stage being around the corner.
What is a Bull Market?
This situation is defined as a marketplace whereby the prices of listed securities are continuously rising due to favorable macroeconomic scenarios or improved internal circumstances of the firm or sector. In general, the terminology is applicable towards stocks but it does also get referenced to other asset classes such as Bonds, FOREX, and Commodities, etc. Since the laws of demand and supply influence the market, prices in financial markets will increase when the supply of stock falls and vice-versa. Certain important facts are:
- Bull markets are preceded by Investor confidence, positive expectations and general optimism in the market
- In the initial stages, most of the market changes are psychological and may not necessarily be accompanied by strong economic information or Corporate earnings.
- In the derivatives market, there will be a huge demand for Call options since the overall sentiment is upbeat and positive.
It is to be noted that “Bull Markets” typically have four phases indicating its life-cycle:
- In the first stage, one is reviving from the pessimistic approach left behind due to the bearish market scenario. The prices are low and investor sentiment is quite weak.
- The second phase ignites a revival of stock prices, earnings by corporates and trading activity picking up with the economic indicators performing at above-average levels.
- In the third phase, market indexes and securities touch new trading peaks. Security trading continues to rise and dividend yields fall low indicating sufficient liquidity in the market.
- In the final phase, IPO activities are high along with Trading and Speculation. Stock P/E ratios are at an all-time high.
Though bull markets offer plenty of opportunities to make money and multiple existing investments, such situations do not last forever and the precise timing of its entry and exit cannot be predicted. The investor must know when to buy and sell for maximizing their gains and attempt to time the market.
One of the popular instances of a Bull market is ‘The Long Bull Market of 1920’s’ which was fuelled by the economic boom and prosperity which bought in Consumerism in the USA, easy availability of credit facilities and increased opportunities for leverage. The situation was so optimistic that stocks were purchased on Margins i.e. stocks purchased on loaned money.
What is Bear Market?
Such a situation depicts a downward trend in the market over a period of time. The markets have a pessimistic approach and the prices of assets are either in decline or expected to fall in the immediate future. It will cost investors a lot of money as security prices will fall across the board and investor confidence is also expected to take a hit.
The characteristics and causes of a bear market will vary as per circumstances but the economic cycles and investor sentiment play a pivotal role in the anticipated direction and how long is it expected to last. Some of the indicators of a weakening economy are:
- Low employment opportunities
- Less Disposable income in the hands of the general public
- Declining business profits
- Existence of several new trading lows and troughs
- Short selling or increasing use of Put options
- Unprecedented changes in the Government rates or various tax rates
Bear markets typically have 4 phases of their occurrence:
- In the first phase, Investor sentiment and prices of securities are very high but the investors are extracting maximum profits and exiting the market.
- In the second phase, prices of stock fall rapidly, trading activity and earning of corporates fall and the positive economic indicators are not performing as expected. The confidence of investors heads towards pessimism and can create a situation of panic. Market indices and a large number of securities reach new trading lows and dividend yields also become very high. This is an indication of more money required to be pumped into the system.
- The third phase highlights the entry of speculators in the market with prices and trading volumes continuing to rise.
- The last phase indicates the further downfall of stock prices but at a slower pace. This is considered as a point of the lowest ebb and investors start believing the worst may be over and positive reaction starts flowing in with bear markets eventually giving way for the bullish outlook to re-enter.
A prominent example of a Bear Market is the recession which was followed by the Wall Street stock market crash of 1929. The investors were struggling to exit the market with sustainable losses getting incurred. For preventing excessive losses, investors continued selling their stocks causing a further decline and market collapsed on October 29, 1929, followed by a sustained depression in the economy called as the ‘Great Depression’. The Dow Jones Industrial Average declined by almost 90% through 1932.
Bull Market vs Bear Market Infographics
Despite the terminologies being used in tandem while explaining the concepts, the differences in both these scenarios are stated as below:
- The market is mentioned as bulls when the overall market scenario is positive and the market performance is on the rise. A bearish market is when the performance of the market is on the decline.
- In a bullish market, the outlook of the investor is very optimistic and this is visible from the fact that investors will be taking long positions in the market. This way, the anticipation is security prices will rise further and investor has an opportunity to maximize profit opportunities. Conversely, in a bearish market, the market sentiment is quite pessimistic and reflected by investors taking a short position i.e. selling a security or undertaking a put position with increased anticipation of a falling market. Hence, if the price falls below the contracted price, the option holder will accordingly book a profit.
- The economy grows sustainably in a bullish market whereas in a bearish market the economy will either fall or not grow at a faster pace as in the bullish outlook scenario. In both these situations, an indicator like the GDP (Gross Domestic Product) plays an important role in giving a bird’s eye view of how the economy is performing based on the existing factors.
- In a bullish market, the market indicators are very strong. These indicators are used in technical analysis for forecasting market trends and various ratios and formulas which explain current gains and losses in stocks and indexes and their expected movement in the future. For e.g. the market breadth index is an indicator measuring the increasing number of stocks versus those which are falling. An index of greater than 1.0 indicates a future rise in market indices and vice-versa if it is below 1.0. In a bearish market, the market indicators are not strong. In either of the scenarios, the causes are interdependent and the cascading effect for the same is observed.
- The job market in a bullish situation is very bright and there are more disposable incomes in the hands of the public in general. However, in a bearish market, the job market is stiff and efforts are being made to control expenses and at a rapid pace if the situation is not improving.
- In a bullish market, the liquidity flowing in the market is very large and investors continue to pump more funds with increased trading activity and investing in stocks, gold, real estate etc. but in a bearish market, the liquidity dries up in the system and investors are reluctant before making any commitments. The investments made during a bullish scenario are either sold preventing further downsides or holding back to them for future usage. It may give rise to hoarding and black marketing situations.
- IPO activities are encouraged in a bullish market since the market sentiments are positive and investors are willing to invest more money, though, in a bearish market, IPO’s are avoided since investments would not be encouraged and people will prefer to hold on to the existing positions and liquidity.
- International investments will automatically get encouraged in a bullish market with the intention to expand the existing portfolio. For instance, if India is going through a bullish phase and South Korea decides to make generous investments in India, such a move will encourage the smooth phase for India, enhance the investment made by South Korea and in turn boost the economy for South Korea thereby spreading the effects of a bullish market across borders. However, in a bearish market, international investments may not be a favorable option for other countries and such a move could be postponed to a futuristic date.
- A bullish market will encourage the banking sector to reduce the interest rates on loans encouraging business activities to grow prompting expansionary policies by the Central Bank and the Government. Conversely, in a bearish market, the banking sector will curb the usage of money for emergency situation prompting contractionary policies by the highest authorities. The interest loans would either be held stable or increased.
- In a bullish market, the yields on securities and dividends will be low highlighting the financial strength of the investor and security others can receive on investment made whereas, in a bearish market, these yields shall be very high indicating requirement of funds and attempting to lure investors by offering higher yields on securities at a later date.
|Criteria/Item||Meaning||Bull Market||Bear Market|
|State of Economy||GDP growth rate and Performance of the Economy.||The high GDP growth is expected and the industrial output is constantly rising. There is high demand in the economy leading to a high sales turnover||The low GDP growth is expected and the industrial output is constantly falling. There is low demand in the economy leading to a low sales turnover|
|Nature of securities gaining or losing||Which securities do well in the State of economy||Securities which give higher reward for bearing higher risk do well in such an environment and therefore Equity is a good investment||Securities that are less risky do well in such an environment because investors have low expectations from the economy and want to keep their money safe. Therefore Gold rises in such environment and Fixed deposits and government bonds are more sought after|
|Interest rate environment||Monetary policy stance||Interest rates are high to keep a check on excessive CAPEX investment to avoid overheating in the economy. Also when the economy does well the foreign investors get attracted looking at higher interest rates.||Interest rates are constantly reduced by the central bank to stimulate CAPEX investment to boost production in the economy.|
|Inflation||Retail and Wholesale inflation||As the consumer demands are higher and the production is also keeping pace due to favorable production conditions, the wholesale inflation is higher because employees demand higher wages and suppliers demand higher prices.||As the production reduces, the goods which are necessary to maintain a standard of living, and have a steady demand see a rise in price. These goods are food, clothing and FMCG items. Therefore there is a spike in retail inflation.|
|Exchange rate||Performance of domestic currency and impact on net exports||The demand for domestic currency increases as more and more foreign investors want to invest in the economy, leading to an appreciation in the currency. This leads to an increase in the cost of production and makes the exports less competitive therefore the growth in Imports is higher than that in the Exports and the net exports may be negative.||The demand for domestic currency falls as foreign investors pull out investments from the economy, leading to a depreciation in the currency. This leads to a decrease in the cost of production and makes the exports more competitive therefore the growth in Imports is lower than that in the Exports and the net exports may be positive.|
|Consumption||Consumer’s stance on spending or saving||With the economy doing well, the consumption is high, because the consumers have greater money in their pockets and pre-pone future consumption with an expectation of continued high economic performance.||With the economy not doing well, the consumption is low, because the consumers have lower money in their pockets and post-pone current consumption in an expectation that the economy will start doing better in the future.|
|Fiscal Policy||Government’s measures of stimulating the economy||Higher taxes are imposed to curtail the amount of disposable income in the hands of the consumer or the producer to prevent the economy from overheating.||Taxes are reduced and subsidies are increased to stimulate the amount of disposable income in the hands of the consumer or the producer to boost the economy.|
|Unemployment||What are the changes in the employment trends||When the economy is doing well, the industry is booming, leading to greater employment.||When the economy is not doing well, the industrial output is falling, leading to greater unemployment due to an increase in the lay-offs to keep the companies afloat and curb the losses.|
Whether the market is going through a Bullish or a Bearish market scenario is not in the hands of an individual or a single factor but large scale factors and other macroeconomic situations. Every investor has to go through such phases at some point since these situations are inseparable. In statistical terms, the market is said to be bullish when the rise of 20% in the performance of the stock market is observed. On the contrary, if the downfall of the stock market of 20% or more is noticed, then a situation of the bearish market is highlighted.
Investors will direct their investments based on various factors that define the outlook through which the market is going through. The entry and exit of the investor get impacted and hence investor sentiment plays an important role in defining how long a bullish or bearish outlook exists. One cannot escape withering of the scenarios and thus a judgmental call has to be taken before making investment and patience should also be held to go through choppy market conditions as well.
Bull Market vs Bear Market Video
This has been a guide to Bull vs Bear Market. Here we discuss the top differences between a bull market and bear market along with infographics. You may also have a look at the following articles –