When Do Bear Markets and Bull Markets Happen?

When we speak about a “bull market”, is it the market that is bullish, or the market participants? The answer is both, because they are mutually dependent. The term usually refers to times in which the economy is strong, employment is high, and people have more money to spend. At the same time, the stock market keeps on rising, and the reason for this is that the companies whose shares are traded on the stock exchange are what keep the economy chugging along.

In such times, traders feel encouraged that the upward trend in the economy will continue. This belief itself, which is expressed through buying behavior on the equity market, fulfills its own prophecy and triggers bullish activity in stock prices. This brings us back to our original point, that the “bull” in the term “bull market” could refer either to the market itself behaving bullishly, (as evidenced in the rising of stock indices like the S&P 500), or to the traders who drive the market (as if we were talking about a market full of bulls).

When the financial markets are not in an uptrend (constantly setting higher highs and higher lows), they are invariably in a downtrend (setting lower highs and lower lows), which is called a bear market. All the opposites apply here: it’s often accompanied by a weakening economy, consumers who are not so willing to spend, and drops in company earnings. Confidence is low and the bulk of share prices are in the red.

Just to clarify: we are not speaking about short-term trends in the stock market, but rather those that occur over longer periods like months or years. The definition is not set in stone, but it’s common to define a bear market as one that has seen a 20% drop from a recent peak. By contrast, when prices fall by less than 10%, the term used would often be “market correction”.

The concepts of bull and bear markets are the bread-and-butter of financial trading, and no less so in the case of trading in CFDs (Contracts for Difference). Therefore, it’s worth spending some time explaining them with the help of some real-life examples.

Bear Markets and CFD Trading

In traditional financial trading, bear markets are normally considered undesirable times to trade, because most equity prices are volatile and headed downward. Traders respond to bear markets by putting their money into things like government-owned utilities, because they relate to goods people keep on buying even when their funds are low. Alternatively, there is CFD trading.

What is CFD trading, and why is it less vulnerable to bear markets than traditional financial trading? Trading CFDs is trading in the price changes of assets – like stocks, cryptocurrencies, ETFs, or commodities – without ever buying or selling the actual asset. If you buy 1,000 CFDs for Tesla shares, you don’t own any part of the Tesla company at all. Rather, you have opened a contract with a broker that stipulates you should be paid a certain amount if Tesla shares appreciate within a given time period (in the event you opened a “buy” deal), or that you should be paid if Tesla shares fall during that period (if you chose to open a “sell” deal).

Since the choice about the type of deal is entirely yours, there shouldn’t be any reason why your CFD trading should be hindered by the onset of a bear market. If you believe the prices of an asset are bound to plummet in the short-term, the option is always available to you to open a sell deal for that asset. In the event its prices do indeed fall in the given timespan, your deal will have met with success.

Bear Markets and Recessions

After the pandemic set in, in March 2020, confidence in the economy sunk and we witnessed thousands of company layoffs, as well as shutdowns, in the wake of the arrival of this unknown entity in people’s lives. There also happened to be an oil price war going on between Saudi Arabia and Russia, which pushed oil prices down.

The Dow Jones Industrial Average, as a result of all this, entered a bear market from March 11th. Several weeks before then, the index was valued at about 30,000, but, after that date, its downward course soon took it to below 19,000. The S&P 500 and the Nasdaq 100 moved in step with the Dow Jones.

The context in which the bear market arrived, in this case, was not an ailing economy, but actually one that was doing quite well. The two factors we mentioned, rather, were powerful enough to drive the downtrend on their own. Bear markets, then, do not always coincide with recessions. The statistics say that only 56% of the bear markets since 1928 were accompanied by recessions.

After only about a month, in the case of 2020, the markets began to bounce back as people started to hope for a successful vaccine and better days for the global economy. How were CFDs affected by all this? With CFD trading meaning the trade in price movements of securities, rather than the purchasing and selling of securities, the answer was: not much.

The Nature of the Bull

In bull markets, there is high demand for securities and low supply, meaning that more people are willing to buy than sell, which drives prices upward. This could refer to the stock market in general, but it also could refer to particular sectors, or assets like oil or gold. September 5th 2011 is known as the end of decade-long bull market for gold prices, when they peaked at $1,895 an ounce after consistent gains. (Before this bull market, gold prices hovered around only $300 to $400 an ounce.) The period between May 2014 and February 2016 is considered a bear market for oil prices because they experienced a sustained downtrend.

For the stock market, the period between 2009 and February 2020 is known as a bull market, since all three major stock market indices kept on gaining. Just to fill in some blanks, bull markets are fueled, not only by self-fulfilling prophecies, but by things like the publicized opinions of respected traders like Warren Buffet, as well as world political events.

When the bulls start running, it might mean there’s trouble ahead. With prices continually pushed upward, traders become willing to pay sums beyond the intrinsic value of securities. This phenomenon is called irrational exuberance and can lead to another one called an asset bubble. This occurs when traders grow aware that security prices are inflated and are bound to burst. They react by panic-selling, which, in fact, does precipitate a price burst, and, thereafter, prices keep dropping.

A case of this would be the 36.8% drop in the S&P 500 index between 2000 and 2002, otherwise known as the dotcom crash. Stock valuations had reached inflated levels prior to this period, and the inevitable result was a decline in traders’ confidence in their assets.

May 2022

In more recent history, we saw a bear market ensue in May 2022 in response to the US Federal Reserve’s policy of persistently raising interest rates. The reason the fed felt impelled to do it was the need to quell the sky-high inflation that had reigned for months.

In mid-March 2022, analysts said the inflated valuations on the S&P had already set the scene for a bear market, but the Ukraine invasion made it much more likely. Since Russia is the third largest producer of energy on the globe, the geopolitical troubles did not bode well for energy markets or market confidence in general.

There was also a blurred outlook on when to expect a resolution to the crisis, with the West set to impose sanctions on Russia, and Russia likely to retaliate economically or even physically. This further consolidated the bear market by sapping away confidence. On top of all that, the Fed was readying itself, not to bolster markets by lowering interest rates, but rather to tighten policy in their mission to tame inflation.

Wrapping Up

As we’ve seen, not every bull or bear market conforms to exactly the same criteria. There’s plenty to take into account about the specific situation in each case, and the intensity and duration of the bull or bear market will depend on those details. In the case of 2022’s bear market, many analysts view the anticipated shift in Fed policy to a more dovish one as a potential turning point.