Assets Bear and bull markets: what you need to know

Anyone who watched the economic news during the corona crisis in March 2020 observed share prices heading in just one direction for days on end: downhill. The term “bear market” circulates in such uncertain times. If, on the other hand, the stock market is flourishing and prices are pointing upward, there is talk of a “bull market.” The third market situation is the “sideways market,” in which prices do not move clearly in either direction.

In this article you will find out exactly when people refer to a bull market and to a bear market, see examples of bull and bear markets from recent history, and discover what you as an investor should keep in mind during these market cycles.

There is no official definition. A bear market generally begins when the prices of securities fall by more than 20 percent over a longer period of time compared to the last high. These can be the prices of an index or prices within a single industry. Often the shares of the largest companies listed on the US stock exchange, i.e. the S&P 500, are used as the base index. If prices are pointing down, the stock market is considered “bearish,” and people refer to a slump, i.e. a low.

There are various explanations for why the bear is mentioned in connection with falling share prices. The image of a fighting bear, beating its paw downward and symbolizing the sharp fall in share prices, is often quoted.

The bull market describes the exact opposite. People refer to a bull market if the share prices of an index or sector remain above 20 percent in relation to the low over a long period. The term boom is often also heard. A bull market reflects investors’ growing confidence in the markets and their expectations of future profits. The bull symbolizes the sharply rising market prices with its horns thrusting upward.

The latest bear market began in March 2020. It marked the end of the longest bull market in history, which started with the recovery from the financial crisis in 2009 and lasted for around 11 years. Looking at the S&P 500 share index and the period between the end of the Second World War and today, there have been a total of 7 bull markets and 8 bear markets during this time – including the current one.

History shows that bear markets are painful. However, they usually last for less time than bull markets. In the past, price losses have also been significantly lower each time than the price gains during the subsequent bull market. This is also confirmed by the most recent bear market. Between 2007 and 2009, the S&P 500 fell by 50 percent, and in the following nine years it rose by more than 300 percent. Since 1945, shares have spent an average of two thirds of the time at or within 10 percent of an all-time high. History also shows that no two bear markets are exactly the same. It is therefore almost impossible to estimate how long an ongoing bear market will continue and when the next bull market will begin.

Bull and bear markets reflect the behavior of investors and their optimism or pessimism. This behavior is influenced by a wide variety of factors, as shown by a glance at the history books. They range from the employment rate or the key interest rate of central banks to fundamental confidence levels among investors. Concerns about inflation and computer-based trading were among the reasons that led to the 1987 Black Monday crash. Even unpredictable global events, such as the current virus, can cause a downturn in the global economy and thus a bear market.

During a bear market in particular, first of all it is advisable to keep a cool head. A bear market is painful, but is historically usually shorter than a bull market. That’s why it makes sense to stick to your chosen investment strategy if the same risk profile still applies. Having the right investment strategy, the right risk profile and a diversified portfolio is the best way to keep possible losses during a bear market within your own financial possibilities and, based on your personal financial needs and goals, to achieve returns in the course of a bull market.

When the market is booming, we all want to enter at the lowest point to achieve the highest possible gains over time. But nobody knows when prices are at their lowest and how long they will go on rising for. One way to “smooth” the cost price is to divide the purchase of assets into tranches at different times. There are a number of steps that can be taken to prepare for a potential bear market and falling prices. These include reducing the proportion of “riskier” investments, such as equities, in your own portfolio in favor of “lower-risk” investments, such as bonds, in order to dampen portfolio fluctuations, for instance. However, it is important to always assess this in the context of your overall investment strategy.

Experienced investors sometimes also buy options, which enable them to sell investments in the future at a predetermined price. This is a kind of insurance on the value of the investment. As with other types of insurance, you can minimize the extent of a potential loss, but you also pay a premium for doing so, i.e. the purchase price of the option. However, the most important hedge within a portfolio context remains broad diversification across asset classes and regions. More information on investing in times of a bear market can be found in UBS’s Bear Market Guidebook.