Defining bull and bear markets
Bull market: A sustained rise of 20%+ in broad market indices from a recent low, typically accompanied by economic expansion, falling unemployment, and investor optimism.
Bear market: A sustained fall of 20%+ from a recent high, typically accompanied by economic contraction, rising unemployment, and widespread pessimism.
The 20% threshold is the conventional definition used by Wall Street and financial media. A decline of 10–20% is called a "correction" — painful but normal, and not a bear market.
Historical context
Since 1928, the S&P 500 has experienced approximately 26 bear markets. Key data:
- Average bear market decline: ~33%
- Average bear market duration: ~9.6 months
- Average bull market gain: ~152%
- Average bull market duration: ~4.5 years
Bull markets are longer and more powerful than bear markets — which is why long-term investors who stay invested tend to do well despite periodic severe drawdowns.
What causes bull markets
- Strong economic growth (rising GDP, employment, corporate earnings)
- Low or falling interest rates (makes future earnings worth more today)
- Technological innovation creating new industries
- Monetary and fiscal stimulus
- Investor optimism feeding itself (momentum)
What causes bear markets
- Recession or economic contraction
- Rising interest rates (increases discount rate, reduces present value of future earnings)
- Credit crises or financial system stress (2008–09)
- Exogenous shocks (pandemic, war, oil embargo)
- Bursting asset bubbles (dot-com 2000, housing 2008)
How to invest through the cycle
In bull markets: Maintain your target allocation. Don't get lured into overweighting equities just because returns are strong — that often sets up the painful rebalancing to come. Cyclical sectors (tech, consumer discretionary, industrials) tend to outperform in bull markets.
In bear markets: Defensive sectors (consumer staples, utilities, healthcare) hold up better. More importantly: resist the urge to exit entirely. The average investor significantly underperforms the market by selling near lows and buying back near highs.
Dollar cost averaging through bear markets is psychologically difficult but historically rewarding — you're buying units of future wealth at a discount.
Key takeaways
- Bull market: 20%+ rise from a recent low. Bear market: 20%+ fall from a recent high.
- Bull markets average 4.5 years and +152%. Bear markets average under a year and −33%.
- Staying invested through bear markets is hard but historically correct for long-term investors.
- Defensive sectors (staples, utilities, healthcare) tend to outperform in bear markets.
- DCA through downturns turns market volatility into a long-term advantage.