In an industry that revolves around data and numbers, it’s surprising how powerful words can be in wealth management and investing.
Right now, the word “recession” is being shouted from media outlets across the U.S. And that word holds powerful sway in the decisions of investors.
In the world of finance and wealth management, we use the terms bear and bull markets to describe fluctuations in the economy.
Right now, we’re in a bear market. Let’s take a look at what that really means.
Defining Bear and Bull Markets
When the S&P 500, Dow Jones Industrial Average, or even an individual stock, has fallen 20% or more from its recent high for a sustained period of time, it is called a bear market. Why attribute it to a bear? Because bears hibernate, representing a market that is retreating. When the stock market is surging, it’s called a bull market because bulls charge.
Interest rates are the current challenge. They are rising as a reaction to inflation. This will slow the growth of the economy by making it more expensive to borrow money. The war in Ukraine has also put upward pressure on inflation by raising the price of commodities.
“With a good perspective on history, we can have a better understanding of the past and present, and thus a clear vision of the future.” — Carlos Slim Helu
The market’s behavior is influenced and determined by the perception and reaction of individuals. There is a direct correlation between stock market performance and investor psychology (how investors view the market). Investors participate in bull markets in the hope of making a profit. In a bear market, investors move their money out of equities into fixed-income securities as they await a positive move in the stock market. When stock markets decline, investors stay out of them. Share prices drop as a result.
What Do I Need to Know About the Current Economy?
In order to make an informed investment decision, you should understand what the market is doing during both bear markets and bull markets. The terms, however, are lagging terms that describe what happened in the past. While in the middle of a bull or bear market, it is impossible to predict where it will go. Investing is a long-term strategy. It is important for every investor to consider his or her time horizon. One of the best indicators of success is the ability to maintain an investment strategy over time.
Terms like “inflation,” “recession,” and “interest rates” can cause a lot of anxiety for investors. But it’s important to remember they are just words. The economy ebbs and flows, and bears come out of hibernation to see bulls charge ahead. However, unlike Mother Nature, we can’t predict when one season ends and another will begin.