With the U.S. federal government cutting interest rates by half a point recently[1], the conversation of bear vs bull markets has reopened. But what are bear markets and bull markets, and how do they apply to private market investors? In this blog, we’ll discuss what bear and bull markets are, why a general understanding of market conditions can be valuable to private market investors, and some indicators to know if we might currently be in a bull or bear market.

Bear vs Bull Markets

These terms generally describe how the markets are doing and whether they are performing above or below expectations. Like a bull thrusting its horns upward signaling a growing economy or a bear swiping its paws downward representing falling prices, referring to the current market as a bear market or bull market is just a symbolistic comparison to the trend of the markets, or certain economic conditions that can influence the markets like inflation, unemployment, stock prices, grocery prices, or interest rates rising or falling.

Market Cycles

Bull and bear markets can be either secular, or longer term, or cyclical, or shorter term. Secular markets are a longer term market cycle and can last anywhere from 10 to 20 years. There may be periods of a “bearish” market with market downswings within an overall bull market or vice versus. Cyclical markets are shorter term, typically lasting from a few weeks up to several months. On average, bull markets typically last longer than bear markets, with bull markets averaging at 3.8 years and bear markets averaging at 289 days.

20% Rule

The general rule of thumb falls around the 20% mark for measuring a bear or bull market. If there is a greater than 20% drop in major stock indexes, that is a bear market. If there is a greater than 20% rise in major stock indexes, that is a bull market. Let’s dive into some of the specifics surrounding characteristics, causes, and results of bear and bull markets.

Bear Markets

Characteristics of a Bear Market

A bear market is characterized by a sustained period of economic decline. As mentioned earlier, a key indicator of a bear market is a 20% drop in major stock indexes. Some may use this term more broadly by stating that a period of falling stock prices, increasing inflation, unemployment, grocery prices, and interest rates are in a “bearish” phase. Markets can be in a period of “bearish” outcomes without officially entering bear market territory with a clear 20% drop in major stock indexes. Bear markets are generally characterized by a weakening economy, less than ideal outcomes in terms of interest rates, inflation, and stock prices.

Causes of a Bear Market

The causes of a bear market are almost impossible to predict and can be difficult to identify. Each bear market period may start with different causes – wars, pandemics, market bubbles bursting. One example from recent past would be the COVID-19 pandemic. The U.S. market entered a “bull correction” at the beginning of 2020, shifting from bull market to a bear market. A National Institute of Health study found that the economic disruptions caused the U.S. economy to shift into a bear market on February 26, 2020[2], 13 days before the World Health Organization declared COVID-19 a global pandemic.[3]

Results of a Bear Market

Continuing with the example of the COVID-19 pandemic, as a result of this bear market, we saw investors selling off their publicly traded stocks, negative investor sentiment, and stock prices decreasing. Many may remember unemployment increasing and grocery prices being driven up during this time.

Bull Markets

Characteristics of a Bull Market

Conversely, a bull market is characterized by a sustained period of economic growth. As mentioned earlier, a key indicator of a bull market is a 20% increase in major stock indexes. In bull markets, typically the economy is growing, investors are buying stocks, inflation and unemployment are down, investors sentiment is positive, and markets are strong.

Causes of a Bull Market

It’s equally as difficult to predict and identify a bull market, and some of the causes of a bull market can also manifest as results. For example, increasing stock prices and lowered inflation can cause positive investor sentiment towards the market, further increasing stock prices.

Bear Rally & Transition into a Bull Market

Back to the COVID-19 pandemic example, the bear market was a secular cycle that lasted from February 26, 2020 to June 3, 2020 when we entered what’s known as a “bear rally”. A bear rally is a period of “bullish” in a bear market. This period was characterized by a growing economy in the midst of the overall bear market. This overall period of bear market with bullish characteristics remained until October 2022 when it reached its most recent low. Then, the S&P 500 began to climb and reached 20% above that low in June 2023, marking the transition into a bull market.[4]

Are We in a Bear or Bull Market?

As of September 2024, some would say we are currently still in the bull market that began in October 2022. The current annual inflation rate is 2.5%, the lowest we’ve seen since February 2021. However, prices are still 21.2% more than when the COVID-19 cause recession began in February 2020. In the midst of signs that inflation is moderating and the labor market is weakening, the Federal Reserve cut interest rates by 0.50% in September 2024, the first interest rate cut since the beginning of COVID-19. The efforts taken by the Federal Reserve come as an attempt to keep a strong economy and to help lower prices in the midst of the current bull market and curb the possibility of shifting into a bull correction.

Impacts on Private Market Investors

Private market investors could also be impacted by bear and bull markets. The higher prices and increased inflation of a bear market may leave less liquid capital to make new investments. Additionally, while investors sell off their public stocks as a cause and response to a bear market, they may be seeking liquidity options for the private market investments. This could impact the secondary market by providing an influx of new opportunities at discounted rates.

Bear markets may play out in the private market by startups raising new rounds, taking on new investors, secondary market prices increasing, and companies considering an initial public offering (IPO).

Final Thoughts

Bear and bull markets are caused by different reasons and manifest with different outcomes, but both could have an impact on every facet of a person’s life. Whether by impacting jobs and prices at the grocery store, impacting public markets and private markets alike, the bull and the bear are just symbolistic representations that can describe the overall economy and are representative of the cyclical nature of the markets in general.

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[1] https://www.cnbc.com/2024/09/18/fed-cuts-rates-september-2024-.html

[2] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8450758/

[3] https://www.yalemedicine.org/news/covid-timeline

[4] https://www.nytimes.com/2024/01/19/business/stocks-bull-market.html

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.

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