In the world of investments, market conditions are often described as "bull" and "bear". They represent the stock markets’ current pulse and tell us if the markets are appreciating or depreciating in value. For every investor, the market direction is of utmost importance as it can have a direct impact on the portfolio. So as an investor you should know how these market conditions could affect your investments. Visit multibankfx.com

Bull market

Customer’s trust and confidence can play a major role in the financial markets for stocks, bonds, and commodities. This confidence is particularly high in the bull markets in which the investment prices are increasing consistently. Thriving economies and low unemployment typically go hand-in-hand with the bull markets, as investors are keen to buy or hold onto securities, making room for a buyer’s market. 

Bull market conditions can have long spells that can live for decades. Some of the top investors have also had to suffer losses because of inaccurately predicting the end of a bull market.

Bear market

On one hand, we have the bull markets that are riding high on optimism, while on the other hand are bear markets that occur when stock prices dip by 20% or more for a prolonged period. Bulls are a typical sign of economic strength, while bear markets are a result of economic slowdown and high unemployment rates. It results in a seller’s market as investors want to sell their holdings to keep funds and fixed-income securities safe. Do remember that bear markets can also have long spells that may last from a few weeks to several years.

Bull vs. Bear Market 

How can you tell whether you’re in a bull or a bear market? Watch out for these factors:

Market performance 

Stock prices increase in a bull market and fall in a bear forex market. If the stock market is under bullish conditions, it would gain value steadily despite some market corrections. If the market conditions are bearish, it would either keep losing value or remain steady at the low prices.

GDP change 

Increasing GDP is an indicator of the bull market whereas declining GDP is associated with bear markets. GDP registers a growth as companies' revenues increase, boosting employee salaries that in turn results in higher consumer spending. GDP falls as companies' sales decline, wages fall or remain steady with no sign of growth. 

Bear markets can be associated with economic recessions and depressions. Recessions are made official when GDP falls for two consecutive quarters, while depressions take place if the GDP trips by 10% or more and the downturn continue for a minimum of two years.

Unemployment rate

A falling unemployment rate is a key indicator of the bull market, while the unemployment rate rises in the bear market. Businesses witness growth in the bull markets as they expand and hire, while the opposite happens in the bear markets that see layoffs. If the unemployment rate rises steadily it prolongs a bear market as a lesser number of people in the workforce earning wages which implies reduced revenues for several companies.

Inflation rate

Price inflation could pose a problem in a booming economy and it may also occur in a bear market. Products and services in bull markets are more in demand which can lead to an increase in prices while falling demand in bear markets can become a cause for deflation.

Interest rates

Low-interest rates typically accompany bull markets, while high-interest rates are associated with bear markets. Low-interest rates make it more affordable for businesses to borrow money and grow, while high-interest rates tend to slow companies' expansions.

Characteristics of Bull and Bear Markets

Even though a bull market or a bear market condition depends largely on the trajectory of stock prices, investors need to be aware of the following aspects as well: 

Supply and Demand 

In a bull market, a majority of investors want to buy securities rather than sell them. This can lead to a rise in share prices since the investors would then compete for the available equity.

The opposite happens in the bear market when people want to sell eagerly rather than buy. The demand is considerably less than the supply which causes the share prices to dip. 

Investor Psychology

Since the market's behavior can be affected by individuals’ responses to that behavior, investor psychology and sentiment play a major role in determining if the market would rise or fall. Stock market performance and investor psychology are not independent of each other. Investors take part in the bull market out of sheer will as they expect to earn profits. 

Bear markets are typically dealing with negative market sentiment since the investors start moving their funds from equities and into fixed-income securities to safeguard their finances. 

Economic Activity

Since the businesses that have stocks trading on the exchanges are an active part of the greater economy, the stock market and the economy have a strong interconnection. A bear market is a sign of a weak economy. A majority of the businesses cannot record profits since the consumers don’t spend as much as needed to keep the market afloat. This leads to a fall in prices which also impacts how the market values stocks.

The opposite of this happens in the bull market. Since the spending capacity improves, there’s more demand in the market which strengthens the economy. 

Investment in a bull vs bear market

The way you invest in stocks in bull and bear markets relies on the kind of time you have at hand. If your fund requirement is not for decades, then the bullish or bearish nature of the market would have little impact on your decisions. If you are a buy-and-hold investor, you need not bother to change your investment strategy because of current market conditions.

The stock market can be bearish despite bull markets taking place in various other asset classes. Suppose the stock market is bullish and you're worried about price inflation, you may want to invest some of your funds into gold or real estate. But in case the stock market is bearish, increasing your portfolio's fund allocation to bonds or even cashing on a part of the portfolio might be the smarter choice.