What is a Bear Market?

A bear market is any point in time in which the market is under a correction and less than 20% from the highs. Bear markets do not have to occur during recessions, they can technically occur at any given point in time. Bear markets are caused by a decrease in prices and a correction of market valuations. A good relatable way of putting this is to say that bear markets are when markets are in a prolonged “downtrend”. Bear markets occur approximately 10% of the time.

What is a Bull Market?

A bull market is any time period in which the stock market is in an uptrend and not in a 20% correction from the highs. Bull markets occur approximately 90% of the time.

What’s the Difference?

In bear markets many stocks trade below the longer-term moving averages, some stocks trade below the 50-day moving average, 200 day moving average, etc. In bull markets this is usually not the case and many stocks are trending near the highs. In bear markets, earnings tend to surprise to the downside while in bull markets they tend to surprise to the upside. This is mostly due to expectations and the fact that earnings expectations are usually higher in bull markets and lower in bear markets and times of recessions.

What Are Stock Price Fluctuations Based Off?

Movements in stock prices are a measure of expectations in many ways. This is the most important thing in terms of price movement. When earnings numbers are released, often time the sole mover of price action is actually going to be the expectations as opposed to the profit margins and bottom line revenues. In terms of price action, it doesn’t necessarily matter how much money the company makes or how much profits are generated, what matters most is the expectations of those numbers. If expectations are low and the company surpasses expectations the price will go up, this is the way of the markets.

What Are Stock Market Valuations Based Off?

Stock market valuations are based off the earnings per share and revenues a company post. You can then value companies based on their earnings or a multiple of their revenue, there are many different ways to value companies and in the not so distant past, stock prices were largely a factor of the dividend corporations paid out to shareholders. So why then do some companies with no revenues and no earnings have such high valuations? Well, there are exceptions to this rule

Timing Investments

As the old adage goes, bulls make money, bears make money and pigs get slaughtered. As an investor it’s always important to be mindful of your financial situation and at what time period you are investing in. Investing in a bear market is usually the best time to invest for savvy investors, however you need to be patient and forward thinking. Take things one day at a time and try you best to see past the noise! If you can look ahead and focus on the long-term vision and plan you’ll be much better off for it.