Bull markets and bear markets: what are they and how do we navigate them?

Ashleay: Welcome to the “In Your Interest!” podcast from iA Financial Group, where we discuss your need-to-know economic news and how it affects your finances. All this in under 10 minutes. Everyone knows about bull and bear markets, but how do you tame them as an investor? My name is Ashleay, and to enlighten us on the subject, I'm with my colleague, Sébastien Mc Mahon, Chief Strategist and Senior Economist. Hi, Sébastien.

Sébastien: Hello, Ashleay.

Ashleay: So, we often hear of a bear or a bull market. Can you tell us more about these terms?

Sébastien: Sure, sure, sure. So, there's two states of the world in the equity markets and stock markets. The market is either in a bull market, or a long-term movement upwards, or in a bear market, which is also a long-term movement downward. So, we call a bull market the environment where the stock market is showing gains in excess of 20% starting from the recent low. So, a good example is that we have a bull market that started in April of 2020 following a strong pullback from the stock market. So, April 2020 was the start of a bull market. We also have a start of a bull market in March of 2009, so that's the initial point where the market after that went higher all the way until we had a bear market. So, a bear market is when the market is down, the stock market is down at least 20% from the most recent highs. So, we had the bear market in early 2020 starting in February, all the way to the low in April of 2020 again. And we had a bear market in the financial crisis of 2008. And in fact, the bear market started in 2007 then. So, the market had a peak, was down quite a bit all the way until 2009. So, there is these two things, these two things don't go into a straight line, but typically you're either in a bull market or you're in a bear market.

Ashleay: Very interesting. And Sébastien can we somehow tame these markets or are we dependent on them according to our investor profile?

Sébastien: So, you can't tame these markets. So, in the long run you see more bull markets than bear markets. So, in the long run, equities tend to be higher, as goes the saying, equities for the long run. So, a typical bull market lasts about five and a half years. And the stats that I'm looking at right now are since 1942 for the U.S. stock market. So, looking at the S&P 500 index, five and a half years for the average bull market and during that period the cumulative total return on average is 155%. So typically, the stock market is moving higher, it's moving higher for a while and it gives you some very decent returns. But, sometimes you have turning points. Typically, it's not always the case, but typically it's when you have a recession coming, so when the economy grinds to a halt. So, we had one in 2020, we had one in 2008. Then, typically, when there there's a recession around the corner, then the market makes a turn lower and this lasts on average about 11 months, so almost a year. So, it's not always something that's very quick like we had in 2020. In fact, 2020 was one of the fastest bear markets ever. So typically, it lasts about a year and the average loss in a bear market is about 30%. So, you need as an investor to recognize which environment you're in. If you're following a recession, then typically you enter a bull market and this can last for a few years. So, along the way you'll have volatility, of course, but that's when you want to have more stocks or more equities in your portfolio, because this is what tends to outperform when you're in a bull market environment. And when you're in a bear market, probably you're going to lean more on the bonds that you have in your portfolio. But timing the market's timing, the peak and the trough, it’s always very hard. So that's why we recommend having a balanced portfolio of equities and bonds. So, you always have something there that is going to be giving you some protection, some gains, and that also removes some volatility in the short term.

Ashleay: Right. So, these things don't go in straight lines, of course. So, what's the typical market behaviour? Because as I understand it now, you would have a bull market for four years, then a bear market for about 11 months, and then you just keep going like that.

Sébastien: No, these two environments also have their bouts of volatility. So, when you're in a bull market, as I said, it tends to last on average many years. During the 2010s, we had a bull market that lasted 11 years. So, it's a very long bull market. But along the way you will have some corrections and the correction is when the stock market pulls back by 10% or more, but less than 20%. So, you'll have all of these episodes. And typically, when that happens, if you look at the economic data and you don't see a recession coming, usually that's a good buying opportunity. So, you just rebalance your portfolio and you benefit from stocks selling on the cheap. If you're in a bear market, so, if you're heading towards a recession and you recognize that the stock market is grinding lower, just like in early 2020 or between 2007 and 2009. Well, along the way on the move down, you're going to have some rallies. We call them bear market rallies. And when these happen, typically it's a good time to take some profits on equities that did well, on stocks that did well, and to rebalance your portfolio. So, there is always volatility. In the short term there's volatility and in the long run you can see the trends. It's important to stay invested for the long run because if you recognize that you're in a bull market, the short-term volatility should not be a reason for you to change or to deviate from your strategy you tend to be in for many years of upward returns.

Ashleay: Fantastic. And by the way, I suggest that in a future episode we could discuss the three most important indicators to follow. So, I'll see you soon.

Sébastien: Sure. Thank you.

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