When you toss a coin, the occurrence of heads or tails is based purely on chance and is, therefore, unpredictable. If you continue flipping a coin 100 times, there may be instances of successive heads or tails. Now, relate this to the short-term movement in the stock market, like the downward movement to tails and upward movement to heads.
Stock market movement cannot be predicted accurately, in the short-term, just like the event of seeing a head or tail when a coin is tossed. However, in the long term when a series of upward or downward movement occurs in succession, a trend can be seen, and this is denoted as a bear market or bull market.
A bull market is a term given to a stock market condition when it is rising or expected to rise. It is generally said that as markets scale up over time, without falling for more than 20% from its previous 52-week peak, it is considered as a bull market. Similarly, the term bear market is applied to the market condition when it is expected to fall, or it falls broadly by 20% from its peak.
Extrapolating to the current market situation, the Nifty 50; Nifty Midcap 150 and Nifty Small cap 250 have declined 14.5%, 17.7% and 18.0%, respectively, from their October 2021 high to May 2022 lows. This indicates that Indian markets are not yet in the grip of a bear market. Market experts, on the other hand, believe that given the current geopolitical environment and macroeconomic factors, we may witness a further decline.
During a bull market, the prices of securities continue to rise. In this phase of rising equity prices, investors believe
that the uptrend will continue for a prolonged period. Typically, it is seen that the country’s economy is strong and employment levels are high during this phase of the market.
During a bear phase, the prices fall, and everything declines, leading to a downward trend. Investors believe that this trend will continue, and it prolongs the downward spiral. In this phase, there is slowdown and increased unemployment levels.
Are you wondering why these phases are named “bull phase” and “bear phase”? There are multiple stories of the origins for these names. One of the most common reasons for this naming convention is the way these two animals ferociously attack. A bull charges ahead, thrusting its horns up in the air and a bear will use its claw to grab and drag its victim down. This movement is metaphorically the characteristic of the market condition. If it moves up, it is considered a market that is charging ahead and when it moves down it is a market that is dragged down.
What drives a bull and bear market? A bull and bear market phase occurs due to various economic factors. Historically, it is seen that both phases occur one after the other, in alternation.
In the Graph 1 given below, the factors that have led to the bull and bear phases in the last 22 years from January 2000 till May 2022 have been highlighted. During the period, at a few instances, the markets were steady. At the beginning of the period from Jan 2000 till May 2003 and after that from September 2010 till September 2013, the markets did not show any trend. It is observed that bull phases last longer than bear phases, over a long-term trend. Over 22 years, there have been five instances of bullish trend as compared to three instances of bearish trends.
Graph 1: Bulls and Bear phases over Nifty 50
Source: Ventura research; data as on May 25, 2022
Based on macro-economic factors, let us explore the differences between the bull and bear market phase below:
| Factors | Bull Phase | Bear Phase |
|---|---|---|
| Economy prices | Stocks can give higher returns for the higher risk they entail. Equity investment returns are good during this time. | Preserving capital and stable income becomes important. So, less risky investments like bank fixed deposits, gold investments and government bonds are sought. |
| Gross domestic production | High GDP growth is expected, economic demand increases, leading to higher industrial output, higher sales, and turnover. | Low GDP expectations, dip in demand leading to the decline in the production of goods, low sales volumes, and turnover. |
| Inflation | Due to increased demand, the production pace continues to grow and proves to be encouraging for wholesalers. Wages rise and suppliers demand higher prices. | Demand shrinks or remains steady as only essentials are required. Food, clothing and FMCG prices increase and put pressure on the retail segment. |
| Interest rate | Interest rate cycle is on an uptrend and foreign investors get attracted to the high interest rate environment. This helps to control the excess liquidity in the economy. | RBI reduces the interest rates to stimulate liquidity and capex to boost production; foreign investors avoid investing or pull out during this time. |
| Consumer sentiment | All aspects of the economy are doing well during this phase, even consumers spend more. The spending power of an individual rises with the expectation that the economy will continue to grow and do well. | Consumption reduces as spending power reduces. An individual intends to save more as the objective is capital preservation, until revival of economic growth. |
| Employment | The economy is thriving, industry is booming, and production is flourishing. Growth is favourable, leading to greater employment. | The economy is sluggish, and segments of industrial and production units get affected. This leads to lay-offs to curtail costs and leads to higher unemployment levels. |
Yet sometimes the markets can behave differently from the larger trends. This is observed when we are investing in direct equity while choosing a stock. In a bearish trend there could be signs of bullish phases and vice versa.
What Strategies May Work In A Bull Vs Bear Market
The ideal investment mantra is to buy low and sell high. That means you should usually buy in a bear market and sell in a bull market; however, we generally see investors flocking to equity markets in a bull run and can exit only during the next bull run to make profit from their investments. Most of the time, investors lose their confidence and exit in the bear market itself by booking losses. But there is a caveat involved; selecting a stock based only on its price during a bear phase, without checking the fundamentals of the company, can be misleading.
When you buy in a bear market, you need to understand whether you are catching a knife or mango. This means that one should always look at fundamentally strong companies while purchasing a stock in a bear market, otherwise you might end up catching a stock that is more like a falling knife (example: Kingfisher Airlines).
The stock of Kingfisher airlines (Graph 2) in 2006 was at INR 76 and later in 2007 it reached its peak of INR 300+ only to fall drastically and never recover. In the end, an investor would have lost all his money because the stock was delisted on May 30, 2018. This is a classic example of a risky proposition which resulted in a permanent loss because fundamental details of the company were ignored at the time of investing in it. Ideally, an investor should have checked if there was value or not in the stock before buying.
Graph 2: Price movement of Kingfisher Airlines
Source: Ventura research
On the other hand, if you had considered buying ICICI Bank, which was a fundamentally strong company, it would have delivered strong returns. The price of ICICI Bank (Graph 3) in December 2019 touched INR 549.4, then it tanked to INR 284 by March 2020 but gradually again scaled to INR 674 in February 2021 and rose further to INR 841.7 by October 2021. Later it did slip in March 2022 to INR 653.8 and again gradually progressed to INR 747 in April 2022.
Overall, if you notice, the value of ICICI Bank’s share has progressed gradually to remain in the range of 500+ levels over a year because of its strong fundamentals. So, this is the fruit which you got for taking the opportunity if you had bought in 2017.
Graph 3: Price movement of ICICI Bank
Source: Ventura Research
Predicting markets for investment purposes is a tough call for anyone, including market veterans. So, to make the most of both phases, investors can invest gradually in a calibrated way that does not lead them to suffer steep losses. If someone started an SIP of INR 10,000 in one of the oldest equity mutual funds, HDFC Flexi Cap Fund, in December 1999 and kept investing even during bearish phases of 2008, 2014, 2015 and 2020, the value of the investment would have grown to INR 334 lakh by May 31, 2022, as compared to INR 141 lakh in Nifty 50 (as seen in Graph 4).
This is because the value appreciated due to the rupee cost averaging feature over the long term. In SIP mode, irrespective of the market condition, an investment of INR 10,000 was made monthly and a number of units were purchased. These appreciated over the years. Effectively, during the bearish periods, more units were bought and during bullish periods, the value grew.
Graph 4: Monthly SIP of INR 10,000 in HDFC Flexi Cap vs Nifty 50
Source: Ventura Research
Therefore, while investing, do not worry about which phase you are investing in, as long as you invest for the long term. That should be your core objective. Markets rise and fall and phases of bull runs and bear periods occur; how you maneuver the journey will determine whether you are going to emerge a winner or a loser.
