Collective Investor Sentiment Affects Markets

Understanding Investor Sentiment

While bull and bear markets describe sustained periods of market movement, the terms “bullish” and “bearish” describe investor sentiment and expectations for the market’s future direction.

• Bullish: A bullish outlook is characterized by optimism and confidence. A person who is bullish believes that prices will rise in the future. This confidence is often fueled by a strong economy, low unemployment, and rising corporate profits. Think of a bull charging forward with its horns thrusting upward, symbolizing rising prices.
• Bearish: A bearish outlook is characterized by pessimism and caution. A person who is bearish believes that prices will decline. These fears and uncertainties are typically associated with economic slowdowns, high unemployment, or negative corporate earnings. The term comes from the way a bear swipes its claws downward, symbolizing falling prices.

Bulls versus Bear Markets. These animal terms metaphorically define the movement of a market. If the trend is aggressively up, it’s a bull market. If the trend is significantly down, it’s a bear market. Both looming markets may be only hinted at before an economic cycle takes hold.

Generally, we identify a bull market or a bear market based on a percentage change in a broad market index, such as the S&P 500. A bull market is officially underway when the market rises by 20% or more from its recent low.

Conversely, a bear market is confirmed when the market falls by 20% or more from its recent high. When a market retreats significantly, this period presents an excellent opportunity to invest.

Bull Markets. This refers to the financial market of a group of traded securities whose prices are rising or are expected to remain stable or rise for an extended period. Securities, especially equities, also held in mutual funds and ETFs, can benefit from a bull market for months or even years. Yet they are difficult to predict. Looking over the years, they occur when stock market valuations rise by 20%.

Signs of a Bull Market  

• The economy is strengthening or is already strong.
• Strong gross domestic product (GDP).
• Less unemployment.
• Investors are eager to invest by buying securities held in mutual funds.
• Positive demand for equity investments increases.
• Lowering interest rates invigorates the stock market.

Taking Advantage of a Bull Market: Investors who want to benefit from a bull market may take advantage of rising prices, though it’s hard to predict when a market will peak. This is why most investors rely on investment specialists who can guide them through the investment process. Note: If you have any questions regarding investments, please do not hesitate to contact me.