Bull and Bear Markets?

Photo of man reviewing market conditions to determine his investment options.

If you’re mildly familiar with investing, or you’ve listened to the evening news once or twice, you’ve probably heard the terms bull and bear used to describe market conditions. You might be wondering, “What do animals have to do with my money and why should I care?” Lots, it turns out.

What are bull and bear markets?

If you’re investing for the long-term, the daily market ups and downs are most likely noise you may choose to ignore, but longer-term trends can affect your returns. On the other hand, if you're a short-term investor, daily market flucuations may have more of an impact on your investments. Financial markets go through cycles of boom and bust—highs and lows.

In investment terminology, you’ll hear these high and low cycles called bull and bear markets.

Simply put, these terms are used to describe how the stock markets are doing over a certain period of time.

Image of market bull and up arrow.

Bull markets are extended periods of strong gains—think of a bull with its horns pointed up and ready to attack.

Image of market bear and down arrow.

Bear markets are extended periods of losses, at least 20% by definition—think of a bear with its nose pointed down and claws scratching down.

When markets are on the rise, they’re referred to as bull markets, when they’re experiencing continued losses (at least 20%) they’re called bear markets.

Bear markets

Bear markets are important to watch out for, especially if you’re at or near your investment goal.

The last two bear markets lasted an average of about 8 months and the market averaged a loss of roughly 40%.1

What would happen if, for instance, you reached retirement and began withdrawals from your portfolio in the same year a bear market arrived? Any losses you suffered would lower your portfolio value and leave you less money for income in retirement.

Bull markets

Bull stock markets have historically been longer and stronger than bear stock markets. Not investing in the stock market, or investing too conservatively during bull markets, may be a risk—especially for younger investors. Not participating in bull market gains can be a missed opportunity to grow your savings.

Why are stocks investments may be good for long-term goals

Generally speaking, stocks can be a good way to help you earn investment return over the long term. But how can anyone say that with confidence?

A look at historical performance gives us a good sense of how stocks are likely to perform over certain periods. And history shows that stocks can be the place for long-term investors.

Using the S&P 500 Index as a benchmark for the U.S. stock market, this table shows how many different periods over the last 90 years (January 1,1928- December 31, 2018) saw either positive or negative returns for stocks.  (For periods one year or longer, we are looking at annualized returns at the end of each calendar year.)

Starting at the top row, we see that just about every other day was either up or down for stocks. Around one year in every three was negative for stocks.

Image of bear vs. bull chart
 

When looking at longer periods, there have been fewer negative periods than positive. That means anyone who invested in the entire S&P 500 and stayed invested for any 20-year period experienced more gains than losses.

This time frame includes the stock market crashes of the Great Depression and the 2008 financial crisis.

What to do in a bull market or bear market

In general, if your investment goal is quite a few years away, you may choose to ride out the market changes. It can be tempting to sell your investments to avoid downturns, but it can be difficult to time it right. If you sell your stocks and don’t invest money back in the market, it can be a challenge to catch up. Missing just a few of the best days in the market may have a significant impact on your investment performance.

Market trends are continually changing. It’s important to stay consistent with your investment strategy, but understanding bull markets and bear markets can help you make investing decisions that work for you. And, working with a financial advisor can help you keep emotions in check, whether the market is a bull or a bear. 

What to do next

  • Both markets, bull and bear, can have significant impacts on your investments. Need a financial advisor to help you figure out your next steps? We can help you find one
  • Stay up to date as our economists take a look at the contributing factors to the economy’s health each quarter.
  • Visit principal.com/retire if you are nearing retirement and ready to shift from saving to spending.

1 2019 Invesco Bull and Bear markets—historical trends and portfolio impact

The information provided is for illustrative purposes only and is not meant to represent the performance of any particular investment.

The S&P 500 Index is an unmanaged index, which is widely regarded as the standard for measuring the U.S. stock market performance. It represents the 500 most widely held publicly traded companies.

It is not possible to invest directly in an index.

Investing involves risk, including possible loss of principal. Past performance does not guarantee future results.

Asset allocation and diversification do not ensure a profit or protect against loss.

The subject matter in this communication is educational and is provided with the understanding that Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

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