It’s almost impossible to watch TV, read an article, or listen to the radio without hearing the terms “Bull” and “Bear” markets being thrown around by investing pundits. But what exactly do these words mean and why should you care? In the second of our Explainer Series, we put these two market conditions under the microscope to bring you current with the terms and what they could mean for your portfolio.
What’s in a Name?
So why name market conditions after two very large, unfriendly, dangerous animals? The reality is there’s no agreement as to how they got their names or why. Some people, however, have suggested that a bull thrusts its horns upward when it goes on the attack, and a bear swipes its paws in a downward motion before it launches at its prey. So there’s your first clue as to the meaning of the terms. In a bull market (like the one we’re in now) the market goes up. In a bear market, it goes down. Simple enough.
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This Market’s Bull (not really!)
So how do you know if you’re in a bull market? Much like the term itself, there’s no universally agreed-upon definition of what it is, but generally speaking in a bull market, share prices rise (or “rally,” another term you may have heard) by 20 percent or more. And it’s not just share prices that rise. Anything that’s traded on an exchange, like bonds or currencies, can also signal a bull market if they rise to the 20 percent or more level. Since Wall Street likes to measure just about everything, here are some bull market statistics you can casually drop into a conversation to impress your family, friends and business colleagues. Since World War II, there have been 11 bull market runs. The longest of these was during the Clinton Administration. It ran for 114 months, from 1990 into 2000. During that time, the S&P 500, as a broad measure of the market’s performance, rose an astonishing 359%*. The market we’re currently experiencing is looking very likely to land itself in the winner’s circle for the longest bull run in history to-date. It started its upward climb in March 2009, right near the end of the fiscal crisis. If the market continues its upward climb until August 22, 2018, it will be the longest ever, at approximately 118 months. Put the champagne on ice!
Can You Bear It?
Now that you’re armed with the knowledge of bull market conditions let’s dissect its polar opposite, the dreaded bear market. Simply put, a bear condition is when the market moves down 20 percent or more from its peak over successive quarters. Usually, this happens after a prolonged bull market. Investors are usually less confident during bear markets because prices decline for sustained periods. This usually results in the sell-off of stocks, bonds, etc., because investors don’t want to lose money as a consequence of the falling prices. The net result is that investors race to pull their money out of the market, which inevitably makes the market plummet even further. Luckily, bear markets don’t rear their ugly heads very often, and their duration is much shorter than bull markets. For perspective, since 1926, the average bear market has lasted approximately 1.4 years as compared to the average bull market run of approximately 9.1 years over the same period, as of the half-year mark, 2018. So just hunker down and ride it out.
Every Cloud has a Silver Lining
Some market analysts are predicting the emergence of a bear market in the near future. When or even if it will happen, no one knows, because even the smartest Wall Streeter and the most sophisticated technology has been unable to predict when a bull market is going to end and bear market begin. One possible clue, and it’s only a clue, is to keep a sharp eye on the Fed. When they start raising interest rates after lowering them for successive periods, it may be a sign that a bear’s lurking nearby.
Lack of clarity aside, it’s not all doom and gloom. There are some measures you can take to help bear-proof your portfolio, and there is one big positive in a bear market of which you can take advantage.
First, analyze your portfolio to see how many blue-chip stocks you own. Blue-chips are the shares of large, financially stable companies that have been around and successful for a long time. These companies are known as safe havens, and it’s where investors often turn when there’s a dip in economic confidence. A rudimentary internet search will quickly populate with names of these blue-chips that you can check against your portfolio holdings.
Bear markets are scary, but they do offer savvy investors one benefit; the ability to buy additional stocks at deeply discounted prices. Warren Buffet is famous for this technique. When bear markets roll around, he dives right in, scooping up millions of shares of great companies that are selling at much less than their intrinsic value. Yes, this strategy takes some intestinal fortitude and a good deal of research (plus some luck, too!), but the net result could be one that’s extremely beneficial to the long-term value of your portfolio.
* Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.