Bull vs bear markets: what they mean to investors

May 25, 20225 min read
Bull vs bear markets: what they mean to investors
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Key takeaways

• A bull market is one that rises amidst a strong economy, while a bear market is one in which the value of stocks is declining and indicates the economy may be shrinking.

• Markets can be hard to predict, so the best play is often to hold on to investments known to be fundamentally sound.

• A 20% asset allocation in alternative investments can help shield a portfolio from volatility as prices flux between bear and bull markets.

More than just the mascots for two of Chicago’s sports teams, bulls and bears also define the trajectory of the stock market. A bull market is one in which stock prices trend upward, while a bear market is one in which prices are falling. Predictably, investor confidence tends to wane in bear markets, while it soars in bull market conditions. Understanding these terms can present smart investors with some wise investment opportunities by utilizing investor sentiment.

Investor psychology

While the economy certainly plays a role in the stock market’s performance, investor behavior can exacerbate its effect. In short, investor psychology and stock market performance can be highly co-dependent. 

A bear market incites negative market sentiment, which in turn leads investors to shift capital away from equities into fixed-income assets to defend against the decline. This capital outflow depresses prices, which serves to intensify the bear market’s effect. Conversely, the atmosphere of exuberance and confidence accompanying a bull market increases buying activity and drives prices upward. 

Having an understanding of this can position investors to profit in both bull and bear markets.

What is a bull market?

More precisely, if a bull market is a period in which there has been a 20% increase in stock prices since the last market downturn of 20%. While the term is most often applied to the stock market, it can refer to any traded asset, including bonds, real estate, commodities or currencies. The most recent bull market in publicly traded stocks began in the wake of the 2008 financial crisis and ran for just over a decade, until uncertainties associated with the COVID-19 pandemic crashed the market in 2020. 

What causes a bull market?

Bull markets typically occur when the economy is either gathering strength, or already exhibiting it. Strong GDP (gross domestic product) numbers, high employment figures and expanding corporate profits inspire robust investor confidence. This leads to more buying activity during a time in which fewer investors are interested in selling. At that point, demand is strong and supply is weak, so prices rise in response to the competition for the available equities. 

What is a bear market?

Bear markets tend to result when economic activity slows. Two of the most prominent symptoms of a bear market include an uptick in the unemployment rate and a decline in GDP. This can trigger investor pessimism.. 

Such doubt typically leads investors to seek shelter in what are perceived to be less-volatile investments. In order to accomplish this, they will sell off their equity positions. With more investors looking to sell than buy, prices fall. When prices fall by 20% or more for an extended period, a bear market exists. 

It is important to note that there is a difference between a market correction and a bear market. A market correction is a decline of up to 19% from a recent high, immediately followed by a period of stability or growth. 

What causes a bear market?

Bull and bear markets tend to coincide with the four phases of the economic cycle: expansion, peak, contraction, and trough. In some cases, bear markets take hold before a contraction actually occurs when investors have reason to believe the economy is about to contract. 

When the economy slows, fewer people have disposable income, so consumer spending goes down. This has a negative impact on corporate profitability, which detracts from the optimism investors have for publicly traded equities. Key factors to observe include stock market performance, GDP changes, unemployment changes, the rate of inflation and the prevailing interest rates. 

Historically speaking, bear market triggers have included rampant investor speculation, irresponsible lending, undesirable oil price movements and over-leveraged investing. There have also been instances in which institutional investors have perceived the market as being overheated and sold off their positions. This activity can incite pessimism among retail investors, resulting in an even larger sell-off. 

Investing in bull and bear markets

In most instances, growth stocks fare well in a bull market, while value stocks do better in a bear market. An investor’s approach, in either bull or bear markets, should largely be reflective of their time horizon. 

Investors with a long time horizon are usually better served by standing pat in a bear market, rather than selling reflexively. This, of course, assumes they are also holding enough safe liquid assets to help them weather volatility and potential downturns. 

The main thing investors should do is remain calm. Given the historical performance of the market, a downturn can represent an excellent opportunity for investors to add to their long-term positions. Trying to time the market seldom works out, as rebounds tend to be both sharp and unpredictable. Engaging a dollar cost averaging approach, along with mechanical rebalancing to a favorable asset allocation target (if needed), can assuage fears and help investors realize benefits from a bear market. 

Investment diversification

Any discussion of what bull and bear markets mean to investors must cover the importance of diversification. Most investors are looking to hedge against the tumultuous nature and not spend their retirement watching CNBC hoping they’ll continue to have enough to get by, and a judicious allocation of alternative investments in opportunities traditionally uncorrelated with stock market performance can often serve as an effective hedge against market volatility. Real estate, private equity, venture capital, digital assets and collectibles are among asset classes designated “alternative investments.” 

Broadly speaking, such investments tend to be less correlated with public equity, and thus offer strong potential for returns regardless of whether it’s a bull or bear market. These assets were traditionally accessible to an exclusive base of wealthy individuals and institutional investors who buy in at very high minimums – often between $500,000 and $1 million.  

Yieldstreet was founded with the goal of dramatically improving access to alternative assets by making them available to a wider range of investors. While traditional portfolio asset allocation envisages a 60% public stock and 40% fixed-income allocation, a more balanced 60/20/20 or 50/30/20 split may make a portfolio less sensitive to public market short-term swings. 


What Investors need to know when it comes to bull vs. bear markets is the importance of staying focused on the long-term viability of the companies in which equity positions are held. A fundamentally strong company will remain so, even during a bear market. The investor who continues to pursue the strategy they devised based upon their overall goals and a thorough understanding of the fundamentals can generally come out of a bear market relatively unscathed.

Learn more about the ways Yieldstreet can help diversify and grow your portfolio.