Bear versus bull market: What's the difference?

A bear and bull market both describe the overall direction of financial markets: Typically, stock prices rise during a bull market and fall during a bear market.

Some people believe the term "bear market" comes from the idea that a bear slashes downwards when it attacks. But the Merriam-Webster Dictionary points to a proverb cautioning that it's unwise to "sell the bear's skin before one has caught the bear."

In 18th-century London's Exchange Alley, traders who sold short were referred to as "bearskin jobbers." Eventually, "bearskin" was shortened to "bear," and the term came to be associated with a speculator who sold stock during a downturn, hoping to buy it back later at a lower price.

"Bull market" was soon coined as a counterpoint — one that compared the aggressive behavior of optimistic traders driving up market rallies to the forceful behavior of bulls, which attack by thrusting their horns upwards.

Here's how to recognize bull and bear markets and how investors should react.

A bull market is typically defined as a period of months (or years) when indexes such as the S&P 500 or the Dow Jones Industrial Average trend upward. While there is no universal definition of a bull market, some experts point to a 20% increase from recent lows as a key indicator.

Characteristics of a bull market:

• Employment levels are high
• Economic activity is healthy
• Corporate earnings grow

The stock market entered a bull market following the Great Recession in 2009 and remained there until the start of the pandemic in 2020.

What causes a bull market?
Bull markets are typically driven by a healthy economy, low interest rates, strong company earnings and optimism among investors.

A bear market is a notable decrease in stock prices, specifically a situation in which a stock index has fallen by 20% or more from its recent highs. It's usually hallmarked by low investor confidence and a perception that the market is risky.

Characteristics of a bear market include:

• Slowed economic growth
• Rising unemployment
• Investors may seek safer assets, such as bonds or gold

Fueled by the economic uncertainty of the COVID-19 pandemic, the stock market entered a bear market in early 2020.

What causes a bear market?
High inflation can dampen spending, while rising interest rates increase borrowing costs for consumers and businesses. Political instability and geopolitical events, including wars and trade disputes, can also create uncertainty and contribute to market declines.

Investors in a bear market may be tempted to sell off their holdings to mitigate the risk of further losses. In a bull market, they may sell some stock for a profit or hold onto it in hopes of even more gains down the line.

But experts suggest leaving your investments alone for the long term rather than trying to time purchases and sales to market fluctuations. To avoid temptation, try not to check your investments more than once a quarter.

Rebalancing your portfolio and maintaining a diversified portfolio are savvy steps regardless of market performance. If you are making portfolio changes during a bull or bear market, though, here are some considerations.

How to invest in a bull market

Investors usually focus on growth opportunities in bull markets.

• Avoid chasing returns: Putting all your money into a single high-performing sector can backfire if the market reverses.
• Invest in growth stocks: Growth stocks and broad-market index funds often perform well as corporate earnings and investor optimism drive up share prices.
• Rebalance periodically: As a stock's value rises, it may take up a larger share of your portfolio than you intended. Rebalancing keeps your investments aligned with your goals and risk tolerance.

How to invest in a bear market

Volatility is hard for most investors to stomach but it can create opportunities.

• Dollar-cost averaging: Investing a fixed amount at regular intervals removes the pressure of timing the market. Over time, you'll naturally buy more shares when prices are low and fewer when they're high, smoothing out your average cost.
• Increase defensive assets: I-Bonds, Treasuries, precious metals and dividend stocks hold up well in a downturn. Demand for defensive sectors (utilities, healthcare, consumer staples) tends to remain stable regardless of how the economy is performing.
• Avoid panic selling: Selling after prices have already dropped can lock in losses and cause you to miss out on a recovery.
• Tax-loss harvesting: Sell losing positions to offset capital gains taxes elsewhere

A robo-advisor is an easy way to remain hands-off with your investing. Top robo-advisors, like Betterment and Wealthfront, offer low-cost diversification and automatically rebalance, so you can feel confident your portfolio is in good hands.

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