Turn on the morning news or read an article anytime we are experiencing market fluctuations or significant economic events, and you will likely hear those in finance discuss whether they believe we are experiencing a ‘bull’ or a ‘bear’ market. What are bull or bear markets? These are terms used to describe longer-term economic and financial activity, but what does that even mean for families, businesses, and individual investors on a personal level?
Bear vs. Bull Markets
A bear market is characterized by prolonged or severe price declines in securities, typically falling 20% or more from recent highs at the time. These conditions present challenges ranging from negative investor sentiment to widespread general pessimism about the financial market or future. Bear markets are associated with declines in an overall market or index like the S&P 500 or the NASDAQ Composite. However, there are also cases where individual securities or commodities may be considered in their own ‘bear market’ if they experience a considerable decline for an extended period, usually over 60 days. Bear markets also are often thought to accompany general economic downturns such as a recession.
A bull market is characterized by a period in which prices are rising or even in anticipation of rising. This usually applies most specifically to the stock market, but can also be applied to other securities that can be traded, such as bonds, real estate, currencies, and commodities. The term ‘bull market’ isn’t used quickly or loosely. It is typically reserved for a sustained period of price decline, rather than typical market fluctuations. For this reason, real bull markets tend to last for months or even years.
The Three Kinds of Bear Markets
Research published by Goldman Sachs demonstrates that not all ‘bull markets’ are one and the same. They assert that there are three distinct kinds: cyclical, structural, and event-driven.
Cyclical Bear Markets
Cyclical bear markets are associated with a normal business cycle fluctuation. The ‘Fed’ (otherwise known as the Federal Reserve System) is the central banking system of the United States. The Fed monitors, supervises, and makes adjustments to our monetary and financial policy as needed in an attempt to keep things safe, flexible, and relatively stable. This monitoring and controlling element means the Fed will intervene to raise rates as they see necessary, thereby controlling prices. Though this is an effective strategy, it also commonly results in a negative outlook for the economy and results in sales of securities. These types of bear markets have average declines of -31% and last on average 21 months.
Structural Bear Markets
Structural bear markets occur from major bubble correction or economic imbalance. One relatively recent example of this type is the recession in 2008. Many businesses and individuals were financially overextended on their liabilities, while financial institutions continued to further compromise on which candidates were considered ‘loan-worthy’ borrowers.
This isn’t the market merely responding to one key event or a business cycle change but instead to a much larger overall flaw that has been present for some time. As such, these types of bear markets are usually associated with a more steep sell-off, increased depth of impact as well as a far longer-length time horizon for recovery. This is, on average, the longest-lasting type of bear market. The length and breadth of the impacts of a structural bear market only serve to compound the uncertainty felt by individuals and businesses, leading to it taking them longer to feel comfortable investing in the markets once again. On average, structural bear markets see declines of 57% and a 42 month recovery.
Event-Driven Bear Markets
Event-driven bear markets are created by the market in response to or anticipation of specific events (and their associated repercussions). Some past examples of this are the declines after WWII, as well as the terrorist attacks on September 11, 2001. Both of these events had significant impacts on the market, but sell-offs are typically less severe and allow for a faster recovery. History shows, event-driven markets have average declines of 29%, and last on average 9 months.
This type of bear market represents the current downturn during the COVID-19 pandemic. The downturn is less due to the coronavirus illness itself, but rather around the measures taken to ‘flatten the curve’ and promote social distancing. The restrictions placed on businesses and social gatherings have drastically slowed economic activity, resulting in the currently suffering financial market.
Understanding the differences in these types of bear markets helps you as an investor to feel more informed and empowered to make more careful, calculated decisions. It helps combat our natural urge to ‘panic’ any time you hear that we may be entering a bear market in the news. Not all of these changes in the market indicate that we are headed straight for a full, prolonged recession or depression. It is often a perfectly normal cycle of our economy, which, over the long-term, is still in a consistent growth pattern.
As always, we are here to guide and serve our clients and their specific interests, but we believe helping explain some of these industry and economic terms may help you feel more at ease or in control during times of market fluctuation. Please feel welcome to reach out to our team with any more specific questions you may have. And, thank you for your trust in us.