Just like life, the stock market also has phases. Markets move up when companies announce expansion plans, acquisitions, and similar developments, which improve their earnings. Similarly, markets either move in a range or fall when there is no incremental trigger for the growth of companies. Phases of big price movements offer many opportunities to savvy investors. These two phases are described as bull and bear phases of the market.
In a bull phase, markets move up. The share price of various companies goes up. In a bear phase, markets fall. The share price of many companies fall. But the differences between bull and bear phases are not so simplistic. However, there are a few distinctions. Let us understand them in greater detail. These distinctions will help understand the key things which trigger bear and bull phases in markets.
The terms bear and bull are thought to be derived from how each animal attacks its opponents. A bull will thrust its horns up into the air, while a bear will swipe down. These actions were then related metaphorically to the movement of a market. If the trend was up, it was considered a bull market. If the trend was down, it was a bear market.
A bull market is not just about the upward movement of the share price of many companies. It is also connected to the duration of such a movement. In a bull market, the share price of companies goes up for a considerable amount of time. Some bull markets last for years. Though there is no clear definition of the beginning of a bull phase in markets. The commonly accepted definition of a bull market is when stock prices rise by 20% after two declines of 20% each. Consequently, the valuation of most companies goes up. In a bull phase, there is a feel-good sentiment among investors.
When the share price of many companies falls for a few months or even years, this phase is called the bear phase. Such a situation generally does not last long. However, downward movements in share price can be very steep. Though, there is no rule to understand the beginning of a bear phase, typically, 20% or more fall from a recent peak is considered the start of a bear market.
The longest bull run in the 21st century in the Indian stock market lasted till January 2008, which started in 2003. In these five years, the Nifty 50 index touched the 6357 mark in January from the low of 930. However, the Nifty 50 index corrected and made a low of 2885 in October, marking one of the most fearsome falls in markets.
Now, let us understand some critical differences in bull and bear markets:
Generally, bull markets are associated with prospects of economic growth. Either a country’s GDP is on an upward trajectory, or there is a general expectation that its economy will expand. Bear markets, however, are an outcome of an economic shock, the slowdown in economic activity or a prospect of contraction in economic activities.
Retail investors tend to participate more in stock markets when the sentiment is bullish. The volume of shares traded goes up along with rising prices. Investors take active participation in the market during the bull run. However, in a bear market, the volume of shares traded goes down. As a result, very few investors are willing to buy shares.
The bull market leads to a vibrant primary market. Rising stock prices increase valuation of companies. Investors accord high valuations to companies. They are comfortable paying a high price for expensive stocks anticipating better times ahead. This allows promoters to raise money by offering shares to the public through an Initial Public Offer (IPO). Bear market leads to low valuations of stocks. Most investors do not have the appetite to invest. Promoters of companies find it difficult to take their companies public when market sentiment is weak.
On the whole, a critical thing that triggers the bear or bull phase in the market is the flow of incremental information about stocks. When good news comes, prices move up, and investors keep expecting strong earnings growth. Then, there is a chain of optimistic estimates of the earnings of the companies. Consequently, many investors become greedy. Historically, it has been observed that when investors become greedy the logic takes a back seat. No wonder Sir John Templeton, a well-known investment Guru and founder of Templeton Funds, once said: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
Savvy investors use the bull market as an opportunity to book their profits and bear markets to build their portfolios. The essence of investing lies in controlling emotions and sitting back to evaluate. One of the greatest investors, Warren Buffett, captures this well: “It is wise for investors to be fearful when others are greedy, and greedy when others are fearful”.