Intro to Investing, Part II: Bulls, Bears & Recessions (And How You Can Prepare)
If you’re anything like me, you’ve found yourself asking:
What’s a bull market? What’s a bear market? And why’d we have to involve wildlife in this equation?
Investing terms can be unreasonably confusing. We shouldn’t have to have an advanced economics degree to understand our own retirement accounts. So, I’m trying to chip away at this confusion with top-level, easily digestible knowledge nuggets. You’re not going to turn into Warren Buffett after reading this, and it’s too elementary for some of my loyal readers. But for everyone else (myself included!) I hope it’s a little helpful — or at least a jumping off point for more research.
RELATED READ: Intro to Investing: Get a Working Definition of Stocks, Bonds, Mutual Funds & Other Confusing Terms That You Kinda Pretend To Know But Actually Don’t
Ahead, get the skinny on bull markets, bear markets and recessions — and what you can do right now to prepare for the next one.
What are bull markets?
For reasons I still don’t understand, BULL markets = GOOD.
(One would think that “bull” might imply bulls*t, and therefore imply a bad market, but one would be very mistaken and also have to say “JUST KIDDING, making sure y’all were paying attention lolz” at happy hour. Hypothetically.)
Remember it this way: Bulls are STRONG.
They charge forward.
Seemingly unstoppable.
Bull markets are strong, and refer to extended periods of time when a large portion of securities (stocks, bonds, etc.) are continuously or aggressively rising. Think about it: If the stock market seems to be doing very well, more and more investors will think “Yesssss, everything is on the up — lemme get in on that action!” So then, the market continues to climb.
When do bull markets happen?
Investopedia already did the writing so I don’t have to:
“ … perhaps the most common definition of a bull market is a situation in which stock prices rise by 20%, usually after a drop of 20% and before a second 20% decline.”
Anything you read will say that there are a wide variety of contributing factors to a bull market, but that they generally occur when the economy is strong or is strengthening. Characteristics include:
Strong gross domestic product (GDP)
Low unemployment rates
Increase in corporate profits
And it makes sense — if you feel confident that the market is strong and that you’ll turn a profit, you’d be more willing to throw your hard-earned dollars toward it, right?
How long can a bull market last?
Bull markets tend to last for months — even years. In fact, we’re in the middle of the second largest economic expansion in U.S. history right now.
Wow, sounds great, everyone’s chipper, economy is strong, what could possibly go wrong?
Enter: bear market.
What is a bear market?
It’s the total opposite of a bull market. Everything is on a downward slope and investors are pessimistic and moody, much like I am if I’m not fed regularly.
(Maybe it’s called “bear” because the market takes a long hibernation?
Hmm. Nah, that’s not a fact, but it makes sense, right?!)
FREE TRIVIA FACT: Apparently these names stem from how each animal attacks? Bulls throw their horns upward while bears strike by bringing their paws downward. Idk, if that were the case, my vote is that we swap ‘em out for bottlenose dolphins and goblin sharks.
So, as the opposite of a bull market, bear markets are slow, sluggish and falling — employment rates are not great, business profits drop, everyone’s moody, there’s a lotttt of Secondhand Serenade on the radio, etc.
Sometimes, politics/policy change impacts the market.
For example, a corporate tax cut might impact the market positively, just as a drop in investor confidence may negatively impact it. Again, when investors fear something is about to happen, they tend to panic and sell all their shares to try and avoid taking losses.
Interestingly, both bear and bull markets are characterized by the level of investor confidence and the expectations for upcoming months. Much of it is speculation — maybe speculation by experts, but still. Isn’t it crazy to think about how people getting cocky or people getting scared can overwhelmingly dictate an entire economy? It’s wild to me.
When do bear markets happen?
Again, there’s no official timer that dings and all of the sudden there’s a bear market, but the definition generally accepted is a 20% market drop from recent highs.
But, bear markets are not to be confused with a market correction, which is typically closer to a 10% drop in the market.
In my head, a market correction is like that gut check you have when you’re dating someone new.
You: Wow! I really like him. It’s only been a few months but things are going so well!
Market correction: Maybe too well?
You: No, no, I think this one might last.
Market correction: That’s what you always say.
You: But I feel like nothing can stop us!
Market correction: But remember 2009? Remember how HE made you feel?
You: Oh, shoot, he does spend an abnormal amount of time studying his food before he eats it. That’s weird, right?
Market correction: Yeah, that’s weird.
You: Probably should pump the brakes.
Market correction: Don’t have to end it yet, just hit him with the ol’ “passive aggressive banter and inability to commit to casual weekend plans” — don’t want to get too wild too fast!
A market correction is different than a bear market, and a bear market doesn’t necessarily equal a recession.
Hold up. What’s a recession, actually?
A recession is a significant decline in the economy that lasts for longer than a couple of months. It’s when there’s negative economic growth, with all charts pushing down in the wrong direction, much like your father’s hairline.
A recession is marked by a downturn in industrial production, global trade, employment rates, a nation’s gross domestic product (GDP), and more.
And you know what the craziest part is? A recession is an absolutely normal and expected part of the economic cycle.
“Wait, so you’re telling me recessions are part of the cycle? Because I am pretty sure I’ve only ever heard of one, and it was in 2009.”
Yeah, that was a big one. A bad one.
And while recessions are expected parts of the cycle, crisis events can trigger them, like the subprime mortgage crisis of 2008.
Thankfully, damning economic crises like the Great Depression and the Great Recession are fewer and farther between than the regular ups and downs in the market.
How do “people” predict an economic downturn or recession?
With all the hot-button headlines that swirl around, it’s important to note that nobody can predict exactly when a recession will hit.
Nobody.
However, when economists, analysts and industry experts are all warning about the same thing, people start to listen.
And that’s what’s happening now.
Dropping home prices, unemployment levels, an “inverted yield curve” — all of these can indicate an impending recession to those who are paying close attention. So can major weak spots that are finally exposed in the U.S. market — such as really bogus, really crappy mortgages being packaged up and given to any homebuyer with a pulse, which is what happened 2005-ish.
So what’s going cause the next recession?
Predictions are varied and wide-reaching, but most experts aren’t ignoring the $9 trillion corporate debt bubble. Trillion with a “t.”
Other considerations revolve around future tax policy changes, global trade wars, actual wars, and a potential miscalculated interest rate policy from the Federal Reserve. Do you see why politics are always dragged into the middle of the conversation?
The majority of economists currently suggest that the next recession will affect the public in 2021.
That is, of course, a guess.
Nobody knows exactly when a recession will hit. But there’s a pretty good chance it’ll be sometime between 2021 and … tomorrow.
How long does a recession last?
Investopedia says that a recession typically lasts anywhere between six to 18 months, and that interest rates usually fall during these months to stimulate the economy.
But just because the actual recession may be short, there are still a lot of long-lasting consequences. Though I was only 16 and softly weeping to Taylor Swift’s sophomore album during 2009, I knew of people over in the real world that simply couldn’t find a job. Or had to put education on hold. Or had to move back home to work a job for which they were way overqualified.
Careers are put on different trajectories, health can suffer, and businesses can suffer because people are forced to tighten their purse strings. People can’t afford new cars, so car salesmen have to fold. Then the car salesmen don’t have any spending money to take their family out to eat at the local diner. Then the diner owners can’t contribute as much to their retirement fund. It’s a ripple effect. And it’s just the reality of a market that fluctuates.
It’s also why you need to get on top of your money now, and not wait until it’s too late.
“So, now that I am thoroughly depressed ... can you please, for the LOVE, tell me what I can do to prepare for a recession?”
Sure can!
Stack up a cushy emergency fund.
This one is pretty self-explanatory. Build up an emergency fund if you haven’t already — typically anywhere from 3 months to 1 year’s worth of your expenses (including rent, groceries, utilities, etc.). The right amount to save depends on your specific circumstances, and who all is depending on your income. I can’t tell you how much to save, but my little free budget sheet can help you identify how much you spend and what you’d need as the bare minimum (free budget sheet linked below!)
RELATED READ: How to Create an Effective, Realistic Budget Based on Your Individual Goals [+ FREE PRINTABLE]
Keep a steely focus on aggressively paying off any debt.
Now’s the time to put a laser focus on paying off those student loans or car note. The best time to become financially competent is when you aren’t forced to be out of broke desperation.
RELATED READ: How to Thrive as a Family with Nearly $1 Million in Debt
Don’t take all your money out of the market.
If you panic and take all of your money out of the market, especially if you’re nowhere near close to retiring or needing the money, you’re doing yourself a disservice. If you can — meaning you are in a financially stable place that allows you a little wiggle room for a long play — ride it out.
In fact, savvy investors who have the capital to do so will invest while the stock market is down and shares are cheap, because historically, the market has recovered and has always been on the rise in the long term.
Improve/enhance your marketable skills.
The best time to increase your skillset and prove your value at work is when you don’t need to. Been thinking about learning HTML5? Putting off that analytics training your workplace is offering for free? Procrastinating that certification that would make your resume stand out?
Now’s the time.
Even if you feel totally secure in your position, it’s a good time to make yourself as valuable and competitive in your industry as possible.
RELATED READ: 7 Alternatives to Punching Your Stupid Coworker in the Face
What else am I forgetting, friends? What other actionable, actual steps can we take to build a brick wall around ourselves in light of an impending recession? Comment below and let me know!
