The terms ‘bull market’ and ‘bear market’ are used commonly in conversations about finance, broadly describing the prevailing sentiment in the financial markets which can significantly impact investment decisions. But what do these terms mean specifically, and how can investors make informed decisions during these market conditions?
These terms are used to characterise market conditions for a particular asset as being one of either rising or falling prices.
Although bull market and bear market are terms very frequently used by investors and financial market commentators, there is no formal definition of either, and no consensus over where and when the terms originated and why they were chosen.
What is a bull market?
There is no formal definition of a bull market, but it is generally accepted to be a 20% rise in prices from their prior lows.
This can relate to any asset or investment, but typically is used to refer to particular stockmarkets.
There is no time restriction on what constitutes a bull market – it can occur over weeks, months or years.
What is a bear market?
Mirroring the common definition of a bull market, a bear market is considered to be a period when asset prices fall by 20% or more from their highs.
Whereas there is no time constraint on the definition of a bear market, they are typically shorter than bear markets.
Historically, shares have – on aggregate – offered good long-term returns, rising more often than they fall. Shares offer investors the prospects of positive returns in exchange for the risk they take in investing in businesses. On aggregate, and over the long-term, it is expected that more companies will be profitable and generate good shareholder than will run into difficulty and lose shareholders’ money.
Why do bull and bear markets happen?
Bull and bear markets can happen in a range of conditions and circumstances.
Bull markets tend to be associated with periods when economic growth is strong or improving, leading to a good or improving outlook for company profitability and shareholder returns.
However, investors are forward-looking and asset prices will often reflect expected future developments rather than current conditions.
Bull markets can develop while economic conditions are still poor, but as investors anticipate an upcoming recovery. Likewise, although bull markets may persist during phases of economic expansion, they can evolve into bear markets while conditions are still strong if investors feel that the economic cycle is near the top and growth is set to slow or contract.
Why is it called a bear or bull market?
Just as there is no formal definition of what constitutes a bull or bear market, there is also little consensus over where the terms originated. Several explanations have been suggested. One is that the terms reflect how each animal would attack an opponent: a bull thrusts its horns upwards, while a bear strikes its paws down.
Another possibility is that the term derives from the historic North American fur trade, where middlemen would sell bear furs to customers in advance and then hope prices dropped before, they acquired the skins from bear trappers to fulfil the orders.
Alternatively, the terms could refer to how to deal with an attack from one of these animals – heading downhill to escape a bear attack but running with the bulls to avoid being trampled.
Wherever the terms came from, they are now a common component of the financial market lexicon, having evolved to be used as general descriptors of investor mood and confidence. Someone who thinks asset prices will rise is bullish, while a more pessimistic individual will be described as bearish.
How should you invest during a bull or bear market?
It is clearly more financially rewarding to be invested during a bull market than a bear market, but due to their uncertain timing and length, it is almost impossible to time investments so that you only experience bull market price rises and not bear market falls.
Investing in assets can have a number of benefits over keeping savings in cash, but a long-term approach is usually necessary in order to give you the best chance of reaping them. The majority of investors will struggle to successfully adjust their investment approach to buy ahead of bull markets and sell before bear markets.
A diversified portfolio approach is also often adopted in order to minimise the short-term impact of ebbs and flows in asset prices, while still allowing you to benefit from their positive long-term expected investment returns. Because one asset class might be rising while another is falling, owning a range of assets can reduce the level of volatility in returns an investor experiences.
Liontrust’s diversified portfolios
Liontrust has a range of funds that may be worth exploring that offer investors the chance to build on diversification strategies. These include the Multi-Asset funds which have a range of options to suit different investors’ needs. The Sustainable managed funds also include a range of options aimed at meeting different investors’ needs.
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This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell investments mentioned, or a solicitation to purchase securities in any company or investment product.
The information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, whether express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
Before making an investment decision, you should familiarise yourself with the different types of specific risks associated with the investment portfolio of each of our Funds and Multi-Asset Model Portfolios. For Liontrust Funds, this information can be found in the final Prospectus and Key Investor Information Documents (KIIDs) and/or PRIIP/KID available on our website: www.liontrust.co.uk. Our Multi-Asset Model Portfolios are available exclusively through financial advisers. Financial advisers can find further information on the different types of specific risk associated with the Liontrust Multi-Asset Model Portfolios in the relevant brochure, also available on our website: www.liontrust.co.uk. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
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This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.
