One of the most interesting statements lately came from Janet Yellen – the former Fed’s Chair and the current U.S. Treasury secretary. On her Twitter feed, she said that since she studied economics back in 1968, the economy went through five recessions, each and every one distinct from the other.
This is an interesting point because recessions trigger bear markets but for different reasons. However, all bull markets are the same. Hence, investors are better off studying bear markets and the way out of the correction and then simply ride the upcoming bull market.
What Defines a Bull and a Bear Market?
The market’s definition of a bull and bear market is a 20% drop/bounce from the highs, respectively from the lows. For example, the 2020 pandemic brought the fastest 20% drop in the history of the stock market. Put it simply, the panic selling triggered circuit breakers, and the market kept falling well beyond the 20% level.
Holding through such periods is difficult. Yet, an analysis of the last century of how much time the market spent in bull or bear markets tells us that bulls won on average.
In other words, bull markets lasted much longer than bear markets. If we add to it the power of compounding on reinvested dividends, the ability to stay long, and holding on to your investments even during the panic selloff, it pays off.
So why do people still sell? The answer comes from the speed of market declines. Panic selling triggers quick declines, so if short-sellers are right, they make a quick profit on a market decline than on a rising market.
After the 2020 stock market meltdown, what followed was the fastest transition from a bear to a bull market in history. Since then, the stock market indices in the United States and in most of the advanced world have reached new highs.
The chances are that the advances will continue. Part of the recent $1.9 trillion fiscal stimulus was checks sent to households to support them through the difficult times the world is living. Yet, when asked how to, they plan to use the $1,400 stimulus check received in March 2021, over 60% of the respondents said that they would either save or invest it.
No matter how you put it, one big chunk of the fiscal stimulus will end up in the stock market. A rising stock market is a leading economic indicator, contributing to the rising wealth effect.
This, in turn, helps economic activity. Therefore, when comparing bull and bear markets, bull markets take longer and are more rewarding than bear ones.