Bull vs. Bear: Understanding Market Phases

by Liz Ann Sonders of Charles Schwab, 9/13/24

When it comes to bull markets versus bear markets, one glance at your portfolio can hint at which one you're in. If your last statement makes you want to tear out your hair, it's potentially a bear market. If checking your statement makes you feel "just right" like Goldilocks, then the market might be in a bull phase.

As two of Wall Street's most prevalent figures, the bull and the bear represent opposite sides of the market cycle: a rising market (bull) and a declining market (bear). For many, they symbolize the perpetual struggle between opposing market forces:

Up versus down
Buying versus selling
Economic expansion versus economic contraction
Market optimism versus market pessimism

Both bear and bull markets can test your mettle, potentially pushing you into emotional decisions that upend your investing strategy. Fear caused by a bear market can make you panic and sell quality stocks with plenty of upside potential, while the false sense of security accompanying a bull market can mean taking too much risk and overextending your portfolio.

Bear markets—typically defined as a greater-than-20% drop in major stock indexes—thankfully occur less often than bull markets, which are defined by a 20% rise. However, a market can be in a bullish or bearish phase characterized by generally rising or falling stock prices over a period of time without officially entering bull or bear market territory.

Both, however, will occur periodically throughout your investing life, whether you're accumulating funds, preparing for retirement, or already retired. Forget any ideas about being able to time them because even experts can't do that. But that doesn't mean you can't prepare your portfolio—and your emotions.

By standing your ground when bears prowl early in your investing career and choosing a more conservative portfolio later, you can learn to weather the associated volatility. And by keeping a careful eye on your portfolio during bull markets, you'll learn to recognize when you've become too aggressive. Portfolio diversification and rebalancing can help buffer the effects of market reversals.

What causes bear markets?

Market trends can be difficult to identify—and nearly impossible to predict. No bear market starts for the same reason. Such a market may coincide with a weakening economy, significant liquidation of securities, and widespread negative investor sentiment.

Weakening economy: In a weak economy, consumer spending decreases, in turn reducing business earnings. A decline in earnings can negatively affect investors' valuations of stocks. A weak economy may or may not fall into a recession, which doesn't always coincide with a bear market.
Liquidation of securities: When more shares are sold than bought or when there's a pullback in the value of stocks versus their projected earnings (the price-to-earnings, or P/E, ratio), stock prices fall in value. When this happens across multiple companies or entire sectors, it can lead to a broader market pullback. Should the overall market depreciate in value by 20% or more, it may be a true bear.
Negative investor sentiment: As share prices decline, such markets tend to generate fear among investors. Some may sell their stocks for cash or fixed income securities; others may feel discouraged from participating in the markets at all.

That's just a sampling. All these things can happen and not cause a bear market. And there can be dramatic downturns in the middle of a bull market that don't meet the 20% decline needed to be an official bear market. For instance, the rate-related downturn in late 2018 and the earnings recession sell-off in 2015 and 2016 both took place amid a 10-year bull cycle.

How long is a bear market?

So far this century, investors suffered through four bear markets:

The most recent was in 2022 after Russia's invasion of Ukraine and post-pandemic stimulus helped send inflation to 40-year highs across much of Europe and North America, leading to steep rate hikes and a sharp decline in the tech sector.
The start of the pandemic in 2020 featured a short bear market.
The Great Recession of 2008–2009 was another rough patch for markets.
The dot-com burst and 9/11-related recession of 2000–2002 caused a bear market.

The good news is none of these down markets lasted as long as this century's bull markets. The most recent bear market in 2022 lasted 282 days and saw the S&P 500^® index (SPX) drop 25% at its trough, or the lowest level from its previous peak. The 2020 pandemic bear market was a "blink and you'll miss it" affair, though anyone who lived through it doubtless won't forget the horrific plunges that year. The SPX fell 34% in just 33 days in the spring of 2020.

The 2008–2009 bear market was far more drawn out and dramatic in terms of losses, with the SPX losing 57% of its value peak to trough in a downturn that lasted well over a year.

Bear market responses

What can investors do when a bear wields its sharp claws? Like the old motto, be prepared. How you prepare depends on your current investing status.

If you're accumulating: Younger investors ages 18–51, who enjoy the advantage of a long investment horizon, should focus on long-term goals, not short-term market movements. The average bear market lasts 409 days and sees a market loss of 36%. But the average bull market lasts 1,866 days and sees the SPX rise 180%. With that in mind, it doesn't make much sense for a long-term investor to sell stocks just because the market falls 20%, as bad as it might feel at the time. Once you sell, it can be difficult to know when to get back into the market, and you might miss hefty gains that often occur as the market emerges from bear hibernation.
If you're near retirement: As you near the end of your working days, your investing approach may become more conservative. This can mean reducing your allocation toward stock investments and increasing your fixed income exposure to potentially reduce the risk to your portfolio. Historically, fixed income investments like Treasury bonds, corporate bonds, and municipal bonds have fared better than stocks during bear markets. A diversified portfolio can also reduce the pain of volatility when stocks sell off.
In retirement: Once you retire, your risk profile should change. This could mean reducing stock market allocation even further and keeping more of your money in cash, though early in retirement your goal may be to keep a portion of your savings in stocks to help counteract the long-term effects of inflation.

What is a bull market?

A bull run can be defined as a period of sustained and fundamentally driven growth in share values. Such markets are typically associated with a strengthening economy, an increased demand for securities, and widespread positive investor sentiment.

Strengthening economy: When the economy does well, employment levels are generally high and people have more money to spend. When consumer buying ramps up, businesses tend to do well as their profits increase. Positive earnings growth tends to attract investors. And with revenue increasing through sales and investment money pouring in, companies can choose to expand by hiring more workers, investing in new projects, resources, or infrastructure, or they can take other steps to further secure or expand their operations.
Increased demand for securities: In a bull market, investors' demand for stock shares increases. When demand increases relative to supply, investors may be willing to pay higher prices to buy shares. When enough investors successively bid up prices to buy shares, the stock price tends to rise. Here's another way to look at it: During an up market, investors are willing to successively pay more for every dollar of earnings that a company generates. This may increase a stock's P/E ratio. Bull markets are often considered periods of P/E expansion.
Positive investor sentiment: Bull runs are generally characterized as periods of optimism in which investors expect market uptrends to continue.

How long is a bull market?

Bull markets typically last longer than bear markets. The bull market that began after the Great Recession and ended with the pandemic went nearly 4,000 days without a 20% downturn, climbing 401%. A bull market in the 1990s lasted even longer, nearly 4,500 days with gains of 582%. That said, each bull market has times when stocks and indexes correct 10% or more, so it's not clear sailing.

Bull market responses

Early in your long-term investing career and into middle age, the same tactic applies to both bull and bear markets: Don't try to time the market. It's impossible. A properly diversified portfolio will likely help you weather any volatile periods during the inevitable corrections that occur during bull markets. As you get older, you'll get more conservative, hopefully providing more volatility protection.

One thing to keep in mind about bull markets, however, is the danger of asset drift. When stocks rise month after month, year after year, there's a risk your portfolio could become too aggressive without any input. If your portfolio starts out with 75% exposure to stocks, a long bull market can carry you toward 80%, 85%, or even higher thanks to those steady gains. This means you'd potentially face more volatility and steeper losses if the market reverses.

That's why it's important to regularly revisit your portfolio and make sure your asset allocation matches your initial plans, unless you've had specific life changes that affect your investment goals. This might mean taking light profits as the market climbs and reinvesting in fixed income or leaving some of the funds in cash. A bull market may feel just right while it lasts, but like Goldilocks, you need to prepare for bears as well.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.