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What are Bull and Bear Markets? Thumbnail

What are Bull and Bear Markets?

Submitted by Sara Worley & Brendan Donahue

Investment Advisors, Manulife Wealth Inc.

        People often hear about bull and bear markets but are unsure of exactly what they are, or how their investment portfolios might be affected. 

        Simply put, a bull market is defined as a period of generally rising stock prices, up at least 20 per cent from the previous low. Colloquially, the market is charging forward.

        On the other hand, a bear market is a general decline in stock prices over a period longer than two months. Any time where stock markets decline for two months or less is considered a correction, not a bear market. During a true bear market, stock prices essentially hibernate.

Historical trends

        There are two questions many people ask about bull and bear markets: How long do markets usually stay in a bull or bear state, and what is the average gain or loss during the period?           

         Mackenzie Investments have compiled data from 1956 to August 2019 in which they define a bull (bear) market as a positive (negative) move greater than 15 per cent for a period of at least 3 months. 

        Using these parameters, the S&P/TSX Composite index has experienced 11 bull and 12 bear markets since 1956. On average, the length of a bull market is 54 months and the gain during the period is 129 per cent. 

        Conversely, the standard bear market lasted just 9 months, with an average loss of 28 per cent. True to form, the 2008 financial crisis lasted just 9 months, but its severity caused a decline of 43 per cent.

        The S&P 500 index in the U.S. posted slightly more exaggerated results. Typically, a bull market lasts 55 months and gains 144 per cent, while a bull market loses 27 per cent over 14 months. This illustrates that compared to Canada, the average bull market in the U.S. sees higher stock prices, but their average bear market lasts over 50 per cent longer.   

Current trend

        The S&P/TSX Composite is currently experiencing a 126-month bull market, with a gain of 176 per cent. Compared to historical bulls, this one has lasted longer than normal with a much larger gain. This, among other things, has caused some analysts to speculate that a bear market, or at least a correction, is imminent. 

        This is not an unrealistic prediction; however, stock prices in Canada are only slightly expensive. The current P/E ratio of the TSX is 17x earnings, versus a historical average of about 15-16x earnings. Also, with bond yields at record lows and real estate prices still high in most major markets, there are really no suitable alternatives to the stock market at this time. In other words, there will be a correction or a bear market eventually (there always is), but the stock markets may have a little room to go before they would be considered truly overvalued.

Final thoughts

        According to Mackenzie Investments’ data, the markets spend more time in positive territory than negative. In fact, the typical bear market in Canada lasts just 18 per cent as long as a bull. Investors might say, however, that bear markets seem to last forever! 

        To successfully navigate market downturns, remember that pullbacks can create opportunities. Though it may seem counter-intuitive, softer markets are often the best time to deploy cash. Think of it as buying something while it’s “on sale”.

        Market corrections are due to short-term events. To get a true bear market, there has to be a catalyst. For example, the credit crisis of 2008 caused a widespread shortage of cash in the economy, prompting a stock market selloff.

        Remaining disciplined during bear markets is crucial. Significant investment bargains can be found, but emotional mistakes can easily be made. It helps to keep in mind that over time, the markets always go up, and a diversified portfolio of high-quality investments is often the best way to participate.