Bulls and bears are widely used to describe the general movement of markets. In addition, the terms ‘bullish’ and ‘bearish’ are often used to describe investor sentiment in certain markets.
Why are bulls and bears used to describe the markets and market sentiment?
The actual origin of these terms is unclear, but one plausible explanation is that the terms were derived from the way these animals attack. A bull uses its horns in an upward motion to attack; conversely, a bear uses its claws in a downward swipe to attack. These actions are then related to the trend of the market. If the market is rising (going up) then it is referred to as a ‘bull’ market, and if the market is falling (going down) then it is referred to as a ‘bear’ market.
How the trend of a market is determined
Typically, a market gaining 20% from the bottom of a certain run is considered a bull market.
While a market losing 20% from the top of a certain run is considered a bear market.
Reasons for bear and bull markets
There are three main reasons that cause different market environments:
• Market supply and demand – general market principles affecting the scarcity of the market cause market prices to increase or decrease.
• Investor sentiment – a change in investor behaviour or feelings toward a market affects the prices of the market. If the market is in favour with investors, this will inherently affect the demand of the market, increasing prices.
• Change in economic environment – the environment in which markets operate also has a crucial impact on prices. The greater the activity in the economy, the more demand in the market.
Where are we now and what does this mean?
There has been a lot of speculation about the current bull market that we are experiencing. This bull market has already seen returns north of 50% and has run for 12 months to the end of March 2021. The question we are now faced with is: Will the good run in investment returns, from our market, continue or will it come to a crashing halt? Unfortunately, there is no crystal ball that will tell us the answer.
Instead of looking for an answer from a crystal ball or timing the markets, look at the facts. Historically, equity markets have managed to recover more than they have lost from the bear markets. If time is on your side, the equity market may be the place to be as it consistently provides superior returns over the long term. It is also useful to point out that although we cannot eliminate the turbulence that comes with shifting bull and bear markets, investors can manage the degree to which their investments respond to these market transitions. Spreading investment risk across multiple investment types is one way investors can experience better risk-adjusted returns, minimising volatility of returns without necessarily reducing return potential.
While the headlines and market environment continue to evoke fear, and investors become increasingly worried about their savings, remember that there are periods of contraction (bear markets) and recovery (bull markets) in every economy. Always keep your financial goal in mind when making investment decisions and speak to a financial adviser before making any drastic changes to your investment.
Article credit https://www.fanews.co.za/article/investments/8/general/1133/the-bulls-and-bears-of-investments/32029