The environment of investors and traders uses concepts specific to the stock exchange. One of them is the frequently used bull market and the bear market. A statue of a bull or a bear can also be seen in front of many world exchanges. But where did they come from and what do these terms actually mean?

In the article, we analyze the origin and meaning of these two concepts. There will also be an up-to-date view of the bear market in 2022. You will learn how long on average the bear market lasts and how deep the downturn it means.

What is the bear market?

A bearish market means a bearish market. Investors are often pessimistic about future price trends. Typically, a bearish market is spoken of when prices have dropped more than 20%. The reference to the bear comes from the fact that the bear knocks down the opponent with its paws during the attack.

The bear market is accompanied by fear and uncertainty

The period of prolonged decline in share prices is often accompanied by a weakening economy (recession) or fear of a slowdown in economic growth. Investors are cautious. Uncertainty in the market is increasing and traders who have suffered significant losses are usually ready to close their positions.

Negative expectations and pessimism may then lead to the undervaluation of some companies. If such a company then surprises positively with quarterly results, the share price could increase significantly, at least in the short term.

The stock market remembers many bearish markets. One of the most famous is the one from the 1930s. It was the beginning of the Great Depression and the American stock exchange then lost its value by over 80%. Also worth mentioning is the bearish market in Japanese stock markets in the 1990s. Another example is the dotcom bubble and the 2008 financial sector crisis.


Also read: Symptoms of impending declines in stock markets


The bear market as an opportunity for long-term investors?

When the stock markets fall, many investors find it hard to bear the fall in value of their investment portfolios and choose to close out some positions. But Columbia University economics professor Laura Veldkamp points out that such a move could be counterproductive in some cases.

“There is no reason to sell everything immediately. If you are a young person who sees investing in stocks as a means of securing a retirement pension, keep doing what you are doing. Do not give up.”

Laura Veldkamp, ​​professor of economics at Columbia University

Portfolio manager Matt Stucky of Northwestern Mutual Wealth Management adds that the bear market can be a great deal, especially for long-term investors. In an investment horizon of 20-30 years, the bearish market is an opportunity to buy stocks at lower prices instead of constantly buying securities that are at their price peaks.

But Matt Stucky also argues that investors should be absolutely cautious and only invest enough money to survive significant price drops and increased volatility.

However, each investor should first and foremost adhere to his own investment plan and chosen investment strategy. Of course, this goes hand in hand with an appropriate money management strategy. Always take into account that both bull and bear markets are natural phases in the development cycle of the markets and bear in mind that they can go up or down much more than what investors would have indicated.

“Markets can stay irrational longer than you stay solvent.”

John Maynard Keynes

What is a bull market?

The term “bull market” refers to a growth market. The bull market is one in which investors have a lot of confidence and hope for further price increases. Some traders and financial institutions talk about the bull market when prices rise by more than 20%.

The reference to the bull stems from the fact that when the bull attacks its victim, it tries to toss it upwards with its horns. Similarly, a “bullish” investor tries to raise the price of a share (or other financial instrument).

The bull market is positive investors’ expectations

The bull market is often accompanied by optimistic moods and positive expectations. In addition, it also leads to increased interest in investments in this period. Usually, inexperienced investors focus mainly on well-known and popular stocks. Alternatively, their attention is drawn to companies whose securities experience strong increases during this period. This can lead to misallocation of capital.

In the bull market, there is a good chance of overlooking lesser-known companies whose price does not rise as much as others. However, they can be an interesting opportunity, for example, for value investing players who are guided by fundamental analysis and market research.

The longer the bull market lasts, the more irrational the price movements can be. Experienced traders are often able to catch a bull market in its early stages, while less experienced traders enter the market when the bull market is actually nearing its end. If already high prices begin to fall, panic and sales often ensue. These may be strong price drops, which means that the uptrend market is definitely coming to an end.

Bull and bear market: market sentiment and investor behavior

The classic bull and bear markets have several things in common. They are often caused by an accumulation of good or bad news. The resulting sentiment and sentiment then cumulatively influence the actions of investors.

In addition, many traders tend to buy stocks that are rising rapidly in price. The price then often climbs higher than investors and analysts originally assumed. Extreme sentiment values ​​(both positive and negative) may indicate a turning point in an ongoing trend.

When does the bull market end?

If the market is overbought, the trend is often reversed. The bullish trend is at its maximum and investors are reluctant to buy at such high prices. Additionally, some investors will want to realize their profits. Accumulation of such factors may, in extreme cases, cause a rapid and sharp fall in prices.

When does the bear market end?

In the bear market, this works the other way around. The price drops so low that investors are reluctant to sell. There are more and more speculators in the market looking to buy at low prices in the hope of rising prices in the future.

Stanley Druckenmiller and his method of detecting the bull or bear end of the market

In addition to extreme sentiment, there are other signals that indicate the bull or bear market is ending. For example, world-renowned investor Stanley Druckenmiller tracks the correlation between cyclical stocks and the overall market. If the prices of these stocks are falling while the market remains up, this is a signal of a fading trend.

Bear market in 2022: 22 bear market from 1929

The dream of many investors is to detect the beginning of a bull market or bear market early in order to be able to realize profits in time and prepare for a change in market sentiment. This topic is extremely topical today.

In early 2020, the world was struggling with the advent of a global pandemic. Shares plunged over 33% in just one month. The economic recovery, however, came extremely quickly, largely due to an unprecedented amount of federal stimulus spending that helped keep the economy afloat.

The worst year began in 2022 since 1970. In the first half, the S&P 500 index fell 21% and on June 13 it closed more than 20% below its January high, thus marking the start of the bear market. Rising interest rates, high inflation, the war in Ukraine and fears of recession are just some of the threats that worry investors.

No one has a crystal ball to tell when the downturn in stock markets will stop and if the worst is behind us. But a look back in time may give us some clues. However, keep in mind that every bear market is different.

We are currently experiencing the 22nd bear market since 1929. Historically, the average bearish market has dropped the S&P 500 index by approximately 37% since 1929, and the market took an average of 344 days to hit its bottom. Applying this average to the situation in 2022, investors could expect the S&P 500 index to drop to around 3,017.

The average duration of the previous bearish markets (high to low) suggests that the bearish market may hit bottom in mid-December 2022. Again, however, this data is purely indicative and does not in any way suggest that the current bear market will follow the characteristics of the previous bear market. and will not be radically different in its development.

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Sources used in the article:

BLEKEMOLEN, J. Wat is een bear market? En wat is een bull market? Uitleg en betekenis. LYNX [online]. Published on 13/07/2022 [cit. 20. 7. 2022]. Available at: https://www.lynx.nl/beurs/trading/fundamentele-analyse/bull-en-bear-markten__trashed/

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