Bulls vs Bears: How to tell what mood the market’s in

Bull and bear markets are terms used to describe the general direction or sentiment of financial markets, particularly when we’re talking about stocks, bonds and commodities.

They represent both extremes: the market running hot, and, when it’s not.

Riding the bull

A bull market is when asset prices, such as shares, are climbing or are expected to rise significantly.

It is a period typically marked by optimism, investor confidence, and positive economic indicators, such as low unemployment and increasing corporate profits.

In a bull market, investors are generally more willing to buy shares because they expect they’ll keep making money.

Bracing for the bear

A bear market is the exact opposite – it’s a period during which share prices are falling or expected to fall significantly.

It is characterised by pessimism, investor fear, and negative economic indicators. It may be triggered by recession, financial crises, or geopolitical events – all things that dampen investor confidence.

In a bear market, many investors tend to be more cautious and they may sell off their investments to avoid further losses.

How do we tell if we’re in a bull or bear state?

1. Market Direction: The most straightforward way to determine whether you’re in a bull market or a bear market is to look at the overall direction of stock prices. If prices are rising, that aligns with the bull.
2. Market Sentiment: In a bull market, investors are generally optimistic – while in a bear, they tend to be more pessimistic and generally fearful.
3. Economic Indicators: Pay attention to key economic indicators like GDP growth, unemployment rates, inflation, interest rate moves and overall consumer confidence.
4. Market Volatility: Bull markets tend to be more stable than the bear, so if investors are panicking and reacting to negative news resulting in sharp price swings, that volatility could point to a bear market.
5. Market Fundamentals: Take the time to have a look at corporate earnings reports. Bull markets are often associated with rising corporate profits, while bears can see declining earnings and as a result – overvalued stocks.

When was Australia in a bull market state?

The ASX200 recently experienced two bull markets – and as a surprise to many, they happened in 2020, the year the COVID pandemic hit. The index had been in a bull market phase, on an upward run right up until the virus hit.

Then there was a severe correction – one of the shortest, but most dramatic bear markets ever seen; it shaved 37 per cent off the ASX200.

But that old bull got up, dusted itself off, and from mid-April 2020 it ran again.

Bear market in Australia

In 1987, Australia’s steepest bear market fall was sparked by the infamous “Black Monday” in the US. That day, the Dow Jones lost almost 22 per cent of its worth, sparking a global stock market decline.

Black Monday hit Australia on Tuesday, October 20^th 1987, seeing the ASX crash 26 per cent that day alone. Over just a few weeks, the index plunged 50 per cent.

Since then, the other bear market to mention came with the Global Financial Crisis (GFC), which again was triggered in the US in 2007. That bear clawed 55 per cent out of the Australian market in 14 months.

So getting down to the nitty-gritty. Is it better to invest in a bull or a bear?

Short of a crystal ball; there’s no easy answer to this question, but, let’s take a quick look at a quote by the infamous Warren Buffet, who once said:

“Be fearful when others are greedy, and be greedy only when others are fearful.”

Warren Buffet