What can you learn from Bull and Bear markets?
When you think of New York City’s Wall Street, you might think of the iconic bull statue, surrounded by tourists snapping selfies with the enduring symbol of American capitalism.
But what’s the story behind the bull and why do people talk about bulls and bears?
The bull is a symbol of growing markets when the economy is doing well.
The bear market is the opposite of this, it is a sign of an economy that is declining with equities losing value.
Think about the symbolism, the powerful bull charging forward, and the bear hibernating when things aren’t quite as strong.
A bull market is typically characterised when asset prices rise, and investor sentiment is positive. The generally accepted definition is when stock markets rise by 20% or more.
A bear market is the opposite, when there is a prolonged period of asset prices declining by 20% or more.
Both bull or bear markets can affect investor behaviour, investors may withdraw their money from a bear market which can trigger a widespread sell off. Likewise, in a bull market, people can feel as if there is money to be made by participating in the market.
However, while investor sentiment can be low in a bear market, there are opportunities to be found. Assets can be bought at a cheaper price than before, with a view of future price corrections on the upside.
Furthermore, while a bull market does suggest positivity and growth, challenges can still present themselves. Investors must be aware that very positive sentiment could lead to assets becoming overvalued. Investing in single stocks that have rallied, runs the risk of potentially buying in at the top of the market.
Where are we today?
Jonny Velu, Investment Specialist at True Potential said:
“We know that over time investments are always going to go up and down in value. Trying to time the market is usually in hindsight after a rally or selloff. This is rarely successful as no one can tell the future.
However, two things that are tried and tested in investing is diversifying and time. Holding a blend of different assets and allowing them to grow over the long term has historically proven to work through bull and bear markets.”
The chart below shows bull and bear markets over the past century and how they have impacted asset prices. The long-term observation highlights how important it is to not lose sight of long term goals in times of volatility. However, past performance is not a guide to future performance and with all investing your capital is at risk.
Source: S & P 500 Bloomberg Finance L.P. 31/07/2023
In illustrating bull and bear markets over the past century, chart 1 not only highlights periods of recession, but it also evidences that while there has and will be times of stress, markets have historically recovered and achieved new highs following them.
Just look back to the 2008 financial crisis where the S&P 500 fell in value by 56.8%, this was followed by a decade of strong returns in a bull market returning 400.5%.
When you are invested for the long-term you will pass through bull and bear markets. Even if returns are negative over a month or year, it is important to remain disciplined and have a calm mentality when making financial and investment decisions. Losses are only crystallised when investments are sold to cash, which can be contrary to long-term goals.
In conclusion, when we consider bull and bear markets, it is a reminder not to get too carried away with short term investment performance. When you are invested for decades, you’ll inevitably pass through many bull and bear markets. Whether you are down or up across a month, or even a year, it is best to keep a calm and disciplined long term view. The value of your investment is only crystallised when you withdraw your money, at which point you will have hopefully built up growth and compound growth over time.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.