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The global stock markets can be highly volatile, with wide-ranging annual, quarterly, even daily swings. Although this volatility can present significant investment risk, when correctly harnessed, it can also generate solid returns for shrewd investors.
You may have heard the terms ‘bear’ or ‘bull’ market, but what do they actually mean in terms of investment markets and what causes them?
Bear markets are defined as a period of time when stock prices fall, typically by 20% or more, and investor sentiment is negative. Bull markets, on the other hand, are defined as a period of time when stock prices rise, and investor sentiment is positive: both bull and bear markets have their advantages and disadvantages.
There are a number of factors that can contribute to a bear market, including high interest rates, inflation, political unrest, and fears of an economic recession. In contrast, bull markets are typically associated with periods of economic growth, low interest rates, and stability.
In stock market parlance, a bear market means stocks are down 20% or more while a bull signals the market is up significantly. In order to accurately assess whether an investment market is in a bearish state, it is important to consider both current conditions and future prospects.
Some key indicators that may signal a bear market include a decrease in stock prices across the board, an increase in volatility, a rise in ‘put’ options (options that allow the holder to sell a security at a set price) relative to ‘call’ options (options that allow the holder to buy a security at a set price) and a flight to safer investments, such as bonds or gold.
If you are considering investing in a bear market, it is important to keep in mind that these conditions can last for an extended period of time and that there is no guaranteed way to predict when or if the market will turn around. As such, any investment made during a bear market should be done so with a long-term time horizon in mind. Additionally, it is important to have a well-diversified portfolio to help mitigate some of the risks associated with bear markets.
The opposite of a bear market, in a bull market, investor sentiment is optimistic, and confidence is high. Prices may rise due to strong economic fundamentals or simply due to investors' willingness to pay more for assets than they are currently worth.
A bull market can last for months or even years, but eventually, the price increase will end, and a bear market will follow. While there is no guaranteed way to predict when a bull market will start or end, there are certain indicators that can give investors an idea of whether the market is about to turn.
For example, if prices have been rising for an extended period of time and valuations are getting stretched, it could be a sign that a correction is due. Similarly, if economic indicators such as employment and inflation are starting to deteriorate, it could be a sign that the market is about to turn. While there is no sure way to predict when a bull market will start or end, understanding the signs may help investors make more informed decisions about when to buy or sell.
While bear and bull markets can have a significant impact on the global stock markets and the global economy as a whole, it’s important to remember that they are part of the natural ebb and flow of the market cycles. As such, investors shouldn’t panic during a bear market, nor should they become complacent during a bull market. Instead, they should maintain a long-term perspective and focus on creating a well-diversified portfolio that can weather any market conditions.
Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.