The stock market, much like the broader economy, moves in cycles, which include periods of expansion and contraction. These cycles ebb and flow over many years, tracing back over a century. In the stock market, periods of growth and decline are known as bull and bear markets.

While the U.S. stock market has historically grown by an average of about 7% annually over the past 30 years, the impact of bull and bear markets can significantly affect short-term investment returns.

In this article, we explain how investors can identify bull and bear markets, why they occur, and what investors can do to respond.

Bull vs. Bear Markets

While experts may use varying rules to define what constitutes a bull or bear market, these terms generally describe the movement in broad stock indices.

A “bull” market refers to the general upward movement of stock prices over time. Investors typically track indices such as the S&P 500, the Dow Jones, or the Russell 2000 to monitor the movements of a basket of stocks. These indices may increase or decrease in value daily, but a bull market would be considered once the index reaches a 20% gain from recent lows.

Conversely, a “bear” market occurs when broad market indices move downward over time, commonly defined as a 20% decrease from recent market highs.

Characteristics of Bull and Bear Markets

Market cycles are driven by investor sentiment, which in turn influences investor behavior.

When investors have a positive economic outlook or are “bullish,” they tend to buy stocks. When more stocks are being bought than sold, market demand increases and outweighs supply, and causes prices to push higher.

In a bear market, sentiment is reversed. When investors have a negative view of the economy, they are more inclined to sell stocks, increasing supply and driving prices down.

Economic causes of Bull and Bear Markets

If investors' feelings about the economy ultimately drive stock prices, what drives investors to be positive or negative about the stock market?

Many factors influence the economy, including interest rates, employment levels, and inflation.

Bull markets often thrive when interest rates are low, unemployment is minimal, and inflation remains low and stable. These favorable conditions fuel economic optimism, encouraging investors to buy stocks and driving market growth.

On the other hand, bear markets often arise when high interest rates, low employment, or rising inflation dampen economic prospects. In such scenarios, investors become more cautious, often opting to sell off stocks, leading to market declines.

Despite these cycles, history has shown that over the long term, the economy tends to grow, and the overall stock market rises in value.

Examples of Bull and Bear Markets

The U.S. stock market has moved cyclically and has experienced numerous bull and bear markets throughout the last century, often sparked by major economic events.

We’ve seen bear markets, such as the 1929 Great Depression, the dotcom crash of 2000-2002, and the COVID-19 pandemic of 2020.

Bull markets have also occurred multiple times throughout the years, recording large stock market increases between 1982-1987, 1987-2000, and 2009-2020.

Investing During Bull and Bear Markets

Trying to predict when the next bull or bear market will occur is challenging, even for the most seasoned investors.

Instead of trying to predict the market, ensuring that you stay invested in the stock market regardless of the market cycle is a surefire way to maximize your earning potential. Dollar-cost averaging your portfolio can ensure that you stay invested at all stages of the market and get a good average price on your shares.

J.P. Morgan found that if you missed just the ten best-performing days in the stock market between January 2004 and January 2024, your annualized returns would be cut from 9.8% to 5.6% on average.

The Bottom Line

Bull and bear markets are natural occurrences in the stock market and something that all investors will encounter throughout their long term investment journey. While these cycles can significantly influence short-term returns, the key to long-term success lies in remaining committed to your investment strategy. By staying invested, even during periods of market decline, you position yourself to benefit from future market growth and maximize your returns over time.

While you’re invested make sure to head to Webull Learn to continue your financial education. Webull has a plethora of educational materials on Stocks, ETFs, Options, and Bonds that will help you further your education and help you make informed decisions.