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Illustration by MELANIE LAMBRICK

Headlines trumpeting a “record bull-run” or investors’ increasingly “bearish sentiment” can be seen as so much jargon and difficult to parse, but bull and bear markets are important for individual investors to understand. We break down what drives bull and bear markets, the effect they have on your portfolio and how to invest smartly during both market conditions.

What is a bull market?

A bull market is a period of months or years when stock prices, measured by a market index, increase 20 per cent or more from a previous low. Bull markets are characterized by broad investor optimism about the state of the market, and tend to coincide with periods of sustained economic growth. Bull markets got their name from the way bulls attack, by thrusting their horns upward.

As Matt Lundy, The Globe and Mail’s economics reporter, noted in June, bull markets often stick around for long periods of time. According S&P Global Market Intelligence, the average bull market for the S&P 500 since the 1960s has run for 59 months – or almost five years – and posted average stock price gains of 165 per cent. On the S&P/TSX Composite, meanwhile, the average Canadian bull market lasted a little more than three years, according to data from Russell Investments, and saw stocks more than double in value on average.

The longest bull run in history began in March, 2009, on the S&P 500, following the 2008 recession, and carried for almost exactly 11 years, ending with the onset of the pandemic in March, 2020.

What is a bear market?

A bear market is a completely different animal. It occurs when stock prices fall by 20 per cent or more from a recent peak. During this time investors tend to feel pessimistic and fearful. Bear markets generally occur alongside periods of economic contraction. However, they are also usually short-lived: between 1929 and 2021 the average bear market on the S&P 500 was 289 days, or nine months, according to Ned Davis Research. The firm found that stock prices decline 36 per cent on average during a bear market.

Bear markets get their name from how stock market declines mimic the way bears attack, with their paws swiping down at their prey.

Both bull and bear markets are common, and a normal part of how stock markets function. The S&P 500 index has seen 27 bull markets and 26 bear markets since 1928.

While major U.S. and Canadian indexes tend to move roughly in concert, their highs and lows will often differ because of the different industry makeup and weighting of each index. The S&P/TSX Composite, for example, is heavier in financial, energy and materials companies and the S&P 500 and Nasdaq indexes are overweight in tech, and will respond a little differently to the same economic developments.

How long does it take to recover from a bear market?

While bear markets themselves don’t tend to last long, the time it takes to reach a full recovery varies significantly. Recoveries are marked by when a market index reaches its previous peak after a low period. Mr. Lundy reported that while stocks rebounded quickly after the equity market rout during the early months of the pandemic, helped along by government support programs, other recoveries have taken years. The recovery from the global financial crisis in 2008 took 1,376 trading days. It took markets even longer to reach their previous peak after the dot-com crash in 2000, at 1,803 trading days, or more than seven years.

It can feel rough when you’re in the midst of it. But Peter Lochead, founder and principal of One London Group and a senior wealth manager at CIBC Wood Gundy in London, Ont., said the short-term experience of watching your portfolio drop and then make what feels like a slow recovery can obscure equities’ historical upward trend. When Mr. Lochead began his career 42 years ago, he recalled the Dow Jones Industrial Average was sitting at around 700 points; by early 2022, the value of the index had exceeded 36,000 points. “[People] tend to dwell on the negative news, but … historically stocks have gone up.”

At times when the economy is suffering, decisions by governments or central banks to introduce fiscal or monetary stimulus are generally received favourably by the market and can trigger a bull run.Kondoros Eva Katalin/iStockPhoto / Getty Images

What causes a bull market?

In general, rising corporate profits and increasing gross domestic product contribute to a bull market because they tend to indicate a thriving economy and strong consumer desire to spend. However, there are exceptions: during the late 1990s/early 2000s dot-com bubble, investor sentiment and enthusiasm for the future internet economy sent the market charging well ahead of underlying fundamentals.

At times when the economy is suffering, decisions by governments or central banks to introduce fiscal or monetary stimulus are generally received favourably by the market and can trigger a bull run. These stimulus packages tend to translate to greater consumer spending, can help businesses hire or retain staff and help with economic growth. During the pandemic, government rescue programs like the Canada Emergency Response Benefit for individuals and the Canada Emergency Wage Subsidy for businesses buoyed the market. A much older example is U.S. president Franklin Roosevelt’s New Deal program, which green-lit massive government spending to stabilize the country’s economy during the Great Depression and helped to spur a four-year bull run.

And what about the causes of a bear market?

Bear markets can be caused by numerous factors. A weak or slowing economy marked by factors such as increasing unemployment, rising interest rates and increasing inflation, contributes to bear market conditions because these factors precipitate household and business belt-tightening.

Bears can also be triggered by hard-to-forecast events such as wars, pandemics or other crises, and when speculative stock market bubbles finally burst.

Mr. Lochead noted the 2022 bear market stands apart from prior ones because while bear markets typically involve higher unemployment, Canadian employers are still facing a tight labour market.

How should investors react to a bull market?

Bull markets engender confidence among investors and the feeling that taking risk will be rewarded, said Maili Wong, senior wealth adviser and senior portfolio manager with Wellington-Altus Private Wealth in Vancouver.

But Ms. Wong cautioned that while bull markets are good to investors, when they see asset prices consistently increasing “greed takes over. People are willing to take more risk than maybe they should be taking.” In this environment, higher-risk and lower-quality assets tend to outperform because “people are trying to chase after things that have future upside, and they’re not interested in the boring, stable stuff.” Investors can overpay for stocks or other assets out of a fear of missing out on a hot investment.

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That’s how bull runs can lead to market bubbles that later burst. The dot-com crash in the early 2000s is one of the best-known examples of these bubbles, but investors may also remember the more recent cannabis bubble around Canada’s legalization of recreational weed that saw publicly traded cannabis producers reach record valuations before experiencing precipitous drops. The highly speculative, hype-driven cryptocurrency craze is another example, with the price of bitcoin surging to more than US$67,000 by November, 2021, then declining to the US$22,000 range in mid-2022.

The trick to investing in a bull market is to stay disciplined, Ms. Wong said. It’s a time for an offensive strategy but that still means searching for valuable companies that will hold up in downturns, and investing in good-quality growth companies as long as they aren’t significantly overpriced.

She also encouraged investors to stick to their guns on the level of risk they’re comfortable assuming. It’s about evaluating the probability of further upside versus the actual probability of downside, Ms. Wong said. It’s about not chasing after trends “even though others may tell you that if you don’t, you’ll miss out and get left behind.”

The action of selling can create a short-term sense of control over something that’s out of their control, Ms. Wong said. “What’s driving this bear market is really underlying emotions that we as humans tend to feel.”STEVE DEBENPORT/iStockPhoto / Getty Images

How should you invest in a bear market?

In a bear market, meanwhile, fear rules the day. As stock prices decline skittish investors often feel the urge to sell owing to a fear of further price drops – something that puts additional downward pressure on stocks. The action of selling can create a short-term sense of control over something that’s out of their control, Ms. Wong said. “What’s driving this bear market is really underlying emotions that we as humans tend to feel.”

Mr. Lochead said it’s important to remember in these markets that your portfolio’s declining value is only on paper, and you have the opportunity to recoup in the eventual recovery. If you sell, you’ll lock in those losses.

Mr. Lochead said one way to put your fears to rest is to think about the businesses you own stock in, and consider the fact that they’re likely still functioning well even if their stock price is down. He gave the example of Canada’s Big Five banks, which have seen their stock prices drop in 2022 between 7 per cent and 18 per cent, but aren’t experiencing any difficulties to their businesses. “Good companies outlast bad markets and recessions,” he said. “Don’t get caught up in the emotion of what’s going to happen day-to-day.”

However, if your portfolio holds a low-quality or speculative asset that may never rebound, you may want to do your research and, based on your risk tolerance, consider whether it’s worth selling and swallowing the loss.

Overall, a portfolio diversified across industries, geographic regions and asset classes will serve investors well in good times and bad, Rob Carrick wrote in January, 2022. This approach is more sensible than chasing an asset and hoping you’ve timed your purchase right.

“When financial assets rise extraordinarily, they tend to fall in much the same way. This is the rationale for old-fashioned wealth building through regular contributions to a diversified portfolio,” wrote Mr. Carrick, The Globe and Mail’s personal finance columnist. “When you invest this way for decades, you build wealth sustainably through up and down markets.”

What’s ‘buying the dip?’

The phrase “buy the dip” was created for bear markets. High-quality companies that may have had overpriced stock during the most recent bull market will revert to more normal prices, or even be undervalued. Ms. Wong said this is a good time to watch for buying opportunities, particularly for dividend-paying companies that give your portfolio a “defensive tilt” and offer you an income stream while you wait for markets to recover.

Globe Investor columnist John Heinzl noted that dividend-paying companies have been “one of the few bright spots for investors” as markets fell in 2022. In his model Yield Hog Dividend Growth Portfolio, 12 of the 22 stocks increased dividends through the first six months of the year, a volatile time characterized by war in Ukraine, tanking markets, red-hot inflation and supply chain snags. “[Dividend stocks] don’t give you the same high-octane gains as growth stocks, but when markets go south the declines are often not nearly as severe.”

The current bear market presents an opportunity for millennial and Gen Z investors to start building wealth, personal finance columnist Bridget Casey wrote. While the past 10 years have boosted the fortunes of mostly Gen Xers and baby boomers who had real estate assets and the income to contribute to their investment accounts, younger investors typically weren’t as well-positioned to ride the bull. Now’s their opportunity.

“When you’re looking at a 30- or 40-year investing time horizon, you couldn’t ask for a better opportunity than to buy stocks at a discount for a year or so as you’re plowing cash into your investment account,” Ms. Casey wrote.

Regardless of whether you’re in a bull or bear market, Ms. Wong said it’s important to define your investment philosophy and stick to a strategy. “Don’t be too pessimistic in a bear market, and in a bull market don’t be too optimistic.”