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Why Do Bull Markets Last Longer Than Bear Markets?

There is a common saying in the stock market – “the bull climbs up the stairs, while the bear jumps out of the window”.

What the above means is that bull markets tend to last for a fairly long time as share prices continue their slow and steady ascent, whereas bear markets tend to be sharp, sudden and quick and bring prices down in a hurry.

Investors who are not aware of this tendency may be caught by surprise and be unsure of how to react. Therefore, I feel it’s good to addresses some of the underlying reasons for this phenomenon and also how investors should position their portfolios to look for opportunities.

Bull – Slow And Steady

At the start of a new bull market, as corporations recover from the previous downturn and sentiment remains fragile, investors may also feel hesitant about committing capital to equities. This explains why bull markets start slow, and share prices only move up after pauses – sentiment remains guarded, and the fear from the previous bear market and downturn is still fresh in people’s minds.

Over time, as business conditions improve and companies report rising profits, cash flows and dividends, investors start to feel more confident and plough more capital into the stock market. Companies need time to execute business strategies and to grow their market share, and this explains the steady rise in share prices over a long period, typically years. There may be a few shocks along the way, but a bull market should remain intact as long as consumer confidence returns and corporations (as a group) can continue to grow profits.

Bear – Fast And Sudden

Sentiment may change swiftly and suddenly without any warning, causing valuations to plunge and people to feel despondent and pessimistic. This usually signals the start of a bear market, but we will only know for sure in hindsight.

Corporations start to suffer from falling sales, weak demand and face problems in refinancing debt, and this will spread across the entire economy and impact employment and other economic indicators. The chief reason for shorter durations in bear markets is because negative conditions tend to be rectified quickly (as governments and companies react to solve problems) and people also do not like to feel pessimistic all the time, so this will eventually give way to more benign business conditions and improved psychology.

How To Position Your Portfolio

Investors who understand the average lengths of bull and bear markets should position their portfolio for long-term growth during a bull market, and be ready to pounce on good opportunities when a bear market arrives.

Since it is pointless to try to predict or time the switch from bull to bear (and vice versa), an investor should, therefore, remain vested in good companies with a view to add on during periods where valuations become significantly more attractive.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.