Bear & Bull Markets: What’s The Difference? (2024)

If you’re running for your life, you may not care whether it’s a bull or a bear chasing you. But as far as stock market parlance is concerned, there’s a big difference between the two animals.

Here’s what investors need to know about navigating the pitfalls of bear markets and capitalising on the potential upside from bull markets.

What is a bear market?

Although there’s no hard and fast rule, a bear market is typically defined as a fall of 20% or more in a major index such as the FTSE 100 or S&P 500, compared to its recent high.

In addition to stock markets as a whole, a bear market can also apply to individual shares or other assets such as commodities.

A bear market differs from a stock market correction, which is typically a fall of at least 10% and tends to be shorter-lived. Historically, stock markets have ‘corrected’ themselves after sudden falls and returned to an upwards trend, rather than signifying the start of a bear market.

According to broker Charles Schwab, only five of the 24 market corrections since 1974 subsequently turned into bear markets.

What triggers a bear market?

A bear market is usually caused by a slowdown in economic growth and rising employment rates, which has a negative impact on investor sentiment. According to investment firm Cazenove Capital, a recession has followed a bear market in 70% of cases in the US since the start of the 20th century.

How many bear markets have there been in the UK over the last 50 years?

The answer is six major ones in the FTSE All Share index, according to investment manager Vanguard. These included the oil crisis (1972 to 1974), Black Monday (1987), the dot.com ‘bubble’ (2000 to 2003), the global financial crisis (2007 to 2009) and the Covid-19 pandemic (2020).

However, while the S&P 500 hit official bear market territory a few months’ ago, UK stock markets have been more resilient. Both the FTSE 100 and FTSE All Share indices are currently flat on a year-to-date basis.

How long do bear markets last?

Historically, bear markets have tended to be shorter than bull markets. According to investment platform AJ Bell, the average bear market in the FTSE All Share has lasted 385 days, with a 37% fall in the index.

However, it also points to the wide variation in length, with the shortest bear market in 1981 lasting just 42 days, compared to over 1,160 days for the fall in dot.com shares in 2000.

The less good news is that it typically takes some time for stock markets to rebound from bear markets. Since 1970, AJ Bell reports that it has taken 648 days for the FTSE All Share index to recover its bear market losses on average.

However, there has also been a wide disparity in this recovery time. The FTSE All Share index recovered its 21% fall in 1975 in just 89 days but took over 1,500 days to rebound from the 49% fall in the global financial crisis (from 2007 to 2009).

What is a bull market?

A bull market occurs when a major stock market index rises at least 20% from its recent low.

Bull markets are characterised by positive investor sentiment and a strong economic backdrop, with demand for equities increasing due to confidence in future share price growth.

Investors should be reassured that, since 1945, bull markets have lasted a total of 65 years for the FTSE All Share index, compared to 11 years for bear markets, according to Vanguard.

How long do bull markets last?

Bull markets have historically lasted longer than bear markets. Vanguard reports that the average length of the bull market has been 5.9 years for the FTSE All Share since 1945, compared to 1.1 years for bear markets.

Returns in bull markets have also historically exceeded the losses made in bear markets.

Charles Schwab reports that the average return for the S&P 500 is 209% in bear markets, compared to an average loss of 38% in bull markets.

However, it’s worth pointing out that if an index halves in value (or falls by 50%), it has to double (or increase by 100%) to return to ‘break-even’.

What should you do in a bear market?

The first rule of investing in bear markets is not to panic. It’s notoriously difficult to time ‘buying low and selling high’, even for professionals.

But there are some steps that you can take to protect your portfolio against a stock market crash:

• Diversify your portfolio: bear markets can be specific to a particular sector or country. A diversified portfolio spread across a variety of different sectors will help to reduce the risk of one sector under-performing.
• Consider investing in active funds: actively-managed funds and investment trusts provide a ready-made, diversified portfolio for investors. Fund managers can also take steps to limit downside losses in bear markets. Another option is to invest in ‘total return’ funds, which aim to deliver modest upside in bull markets but protect against losses in bear markets.
• Drip-feed investments: it can be highly tempting to ‘buy on the dip’ with the expectation that depressed share prices will shortly rebound. This can often lead to further losses as market rallies prove to be short-lived. Drip-feeding money through monthly investing reduces the effect of market volatility and allows investors to pay the average price over a period of time.
• Remain invested: as mentioned, stock markets have historically rebounded from bear markets and rewarded investors with significant gains. According to broker IG, there has never been a 10-year period where a FTSE 100 investor would have lost money since 1984, with an average annual return of 9%. Having a five to 10-year investment horizon should help investors to ride out bear markets.

What should you do in a bull market?

It is undoubtedly easier to manage an investment portfolio in a bull market, when share prices are rising. However, there are a few things to keep in mind:

• Rebalancing your portfolio: a diversified portfolio can become unbalanced if one portion delivers particularly high gains during a bull market. It’s worth reviewing the composition of your portfolio on a regular basis to check it’s not overly focused on a sector or region.
• Deciding when to ‘profit take’: one of the hardest investing decisions is deciding when to sell shares and take the gains. Sell too early and you may sacrifice further gains in a rising market. Equally, stock markets may fall and the opportunity to sell at a high price is lost. One option is to ‘sell the gains’, in other words, sell a portion of the investment equal to the profit made and reinvest this elsewhere.
• Reviewing your investment horizon: some investors may need to access their money in the next few years, either as they are looking to retire or are planning to buy a house or car. Although it can be tempting to leave money invested in equities in bull markets, a lower-risk approach would be to start moving funds from higher-risk to lower-risk investments, including alternative assets such as cash and bonds.
• Consider share purchases carefully: it can be difficult to predict when bull markets will end and share prices may start to fall. If you’re looking to buy shares, one option is to drip-feed your investment on a monthly basis to smooth out your average ‘in cost’. More generally, investors should carry out their own research, such as comparing price-earnings ratios, to check that shares are not overvalued before deciding to invest.

While it can be painful to see your equity investments go into ‘the red’ during bear markets, they are a natural part of the economic cycle. According to IG, investors should reasonably expect the stock market to fall by at least 30% every 10 years before recovering.

Avoiding knee-jerk investing decisions and maintaining a diversified portfolio should help investors to weather the downturn and be well-positioned for the next bull market.