Bull vs bear market – what to do when
Bull market and bear market are financial terms coming from the stock market jargon, meaning two different processes in the economy. They describe how stock markets are doing in general – whether they are appreciating or depreciating in value.
How do these terms relate to pretty much everyone? Let’s explain and find out.
Briefly on differences between bull market and bear market
As it is defined on Investopedia, bull market is a market that is on the rise and where the economy is sound; while a bear market exists in an economy that is receding, where most stocks are declining in value.
But is it that simple? Well, not entirely.
We’ll see why further in the article, but now let’s describe both types of markets in a little bit more detail.
The same quoted Investopedia defines a bull market as typified by a sustained increase in prices. In times of bull market, investors often have faith that the uptrend will continue over the long term. In this scenario, the country’s economy is typically strong and employment levels are high. In a bull market, there is a strong demand and weak supply for securities – investors tend to buy securities but few are willing to sell them. As a result, share prices will rise.
A bear market is one that is in decline or a market that has fallen 20% or more from recent highs. In a bear market, share prices are continuously dropping. This results in a downward spiral, as investors tend to believe it will continue. This is why during the bear market, it is usually believed that the economy slows down and unemployment rises as companies begin laying off workers. How to avoid this spiral? By beating inflation with investing, experts say.
Are we in a bear market right now?
Any Google search will say yes, as the Covid 19 pandemic, war in Ukraine and other ongoing global events do have their impact on the world market economy, and as we already found out, this usually characterises bear market. Extrapolating to the current market situation, the Nifty 50; Nifty Midcap 150 and Nifty Small cap 250 have declined 14.5%, 17.7% and 18.0%, respectively, from their October 2021 high to May 2022 lows.
If we compare last years and this years performance of BTC, ETH and AR, we can see that the market has gone down heavily: whilst in 2021 we saw the crypto markets boom and mature, with different sectors flourishing and largely outperforming the market leader, bitcoin. In 2021, bitcoin (59.8%) was being the top performing asset even before crude oil (56.4%).
In August 2021, BTC was worth $47,663.02. Today, August the 1st in 2022, it’s price is $23,739.48 and it is predicted to fall even lower. Ethereum’s price in August 2021 was $3,280.41. Today it is $1,706.50. Arweave Price (AR) is $14.77$ today, but its price a year ago, in August 2021 went from $11.77 to above $34.
But, at the same time, sources claim that you can not determine the market as a bull or bear by small economical movements as it could be a market’s knee-jerk reaction to a particular event. Defining a market is possible only after we acknowledge its whole performance over the long term. Small movements only represent a short-term trend or a market correction. Whether or not there is going to be a bull market or a bear market can only be determined over a longer period of time.
We have recently also seen an upward trend in the market – but I’m reminding that short changes don’t mean a definite shift in the market (but we can always hope the bull is on the charge!)
The investment experts predict, that, yes, the ongoing process in market is a recessive one and all signs show that we will have bearish markets at least all 2022. So what do we do when we’re in a bear market? Do we build or do we invest, or what?
Why is the bear market healthy?
Firstly, always remember that the bear market is healthy. Bear market situations are inevitable and economically natural, and they are triggered by global events, for example, pandemics. It is a common fallacy to confuse a bear market with an economic recession. Yes, they can go hand in hand but not necessarily.
Secondly, don’t panic and make any sudden financial decisions just regarding a market situation. Conventionally, it is considered that a bear market can be more dangerous to invest in, as many equities lose value and prices become volatile. Since it is hard to time a market bottom, investors may withdraw their money from a bear market and sit on cash until the trend reverses, further sending prices lower.
In a bear market, the opposite is true: more people are looking to sell than buy. The demand is significantly lower than supply and, as a result, share prices drop. Remember again – for long term investors, bear markets are healthy and necessary without which there would be no risk premium available in the market from which to generate returns.
Is the bear market a good time to build? Or attract investors?
During #BearMarkets, you can see which projects are the good ones immediately, the bad ones fall like dominoes. Separating weed from chaff.
Those that remain, have good fundamentals, houses built on good foundation – stone instead of sand 💪🏻
— Herbert R. Sim (@HerbertRSim) July 31, 2022
As it is said by a start-up business expert:
bear markets [..] clean out the dead wood and allow new green shoots and the projects with real substance to thrive.
The bear markets are a good time for building structures, instead of forming foundations. The author says that we can use cryptocurrencies in other areas of the economy – not just for the trading of digital currencies or using digital assets as a store of value. For example you can leverage blockchain to enable transitions and capabilities in other data-hungry industries.
With the stock market’s rough start to 2022, many people may wonder if now is the right time to invest. The answer is yes, because one of the worst things you can do while stock prices are declining is panic and sell your investments. But at the same time it is important to keep in mind the investors psychology. Not only markets are describable as bear or bull. Investors tend to be bullish and bearish, and the majority of investors are typically “bullish”.
Because the markets’ behaviour is impacted and determined by how individuals perceive and react to its behaviour, investor psychology and sentiment affects whether the market will rise or fall. Stock market performance and investor psychology are mutually dependent. In a bull market, investors willingly participate in the hope of obtaining a profit.
During a bear market, market sentiment is negative; investors begin to move their money out of equities and into fixed-income securities as they wait for a positive move in the stock market.
What to do in a bear market?
There are many ways to profit in both bear and bull markets.
The key to success is matching the right investment tools to each market and using them to their full advantage. Perfectly timing the market is almost impossible and bear markets can occur at any time and without a warning, so investors can be easily caught off guard. But one thing is historically consistent – bear markets happen and are a normal part of the long-term investment cycle.
Pro tip from stock experts is to diversify your assets – allocating your investment money across a broad range of companies, industries, and investment asset types, that may react differently to the same economic event, can help your portfolio weather the ups and downs of financial markets, says Investopedia.
And to conclude this piece on bear market, always keep learning, use social media to learn but beware of following the herd.