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Analysis & Learning

Bull and Bear Markets – What do they mean?

June 30, 2022

American stock markets, backed by the formidable power of the US economy, spend most of the time climbing. This is known in the jargon, goodness knows why, as a bull market. The opposite condition, a period of falling prices, is known as a bear market.

Since 1974, spanning a period less than a normal lifetime, the Nasdaq Composite index, an excellent proxy for the performance of the US stock market, has risen, trough to peak, 294 times. There is an ETF which tracks the performance of the Nasdaq Composite. Like other ETFs it is best known by its code, ONEQ. Many investors could do a lot worse than buy shares in this ETF, which is up 11-fold since 2009.

ETF stands for Exchange Traded Fund. Exchange Traded because they are traded on the stock exchange like all other shares. Fund, because they are collective investments but instead of being actively managed like traditional funds they track the performance of an index, in this case the Nasdaq Composite index. For this reason they are also known as passive funds. 

There is no need for stock selection; no need to worry that the share you have bought might be in a company which goes bust. ONEQ is guaranteed to do as well as the Nasdaq Composite and comes with a low 0.21pc expense ratio so nearly all the performance accrues to your benefit.

In a bear phase, like other shares, ONEQ will fall but as far as we can see from looking at the chart above the odds are excellent that the fall will be temporary and the rising long term trend will resume.

There are various reasons why bear markets occur. The main one is that most of the time shares are in a bull market. As a friend of mine once said – for the aircraft to crash it first has to fly. American shares spend most of the time flying so the occasional crash is inevitable.

Two main factors cause bear markets. The first is rising interest rates. When rates go up because of inflation and an overheating economy, the return on bonds and cash increases. This draws money out of shares, giving them a tendency to fall.

The second reason for bear markets is some unexpected negative event, sometimes known as a black swan. Two recent black swans were the outbreak of Covid-19 and Putin’s invasion of Ukraine. 

Two main factors cause bear markets; rising interest rates and unexpected negative events.

These macro effects impact the whole stock market but often make little difference to the performance of individual companies. Apple was a great company before these events and remains a great company now. Most likely therefore any weakness in the shares will be short-lived. If I look at a chart of Apple shares, they peaked at around $182 in December 2021 and had been trending gently lower ever since.

The attraction of these periods of downtrending prices is that once they are clearly established we can start looking for them to end. At Quentinvest we have various indicators which alert when a downtrend is coming to an end and shares are becoming attractive to buy again.

We also have indicators that alert us to a weakening uptrend and give us early warning that it is time to sell. In practical terms Quentinvest subscribers were guided  to sell shares in early December 2021 and again in early January 2022. We have recently begun to turn bullish and have been suggesting shares and ETFs for our subscribers to buy.

Underpinning the long-running bull market in US shares is a hugely important phenomenon, which we and others call the technology revolution. We believe this revolution is accelerating, is the most important revolution in human history, and because it is led by businesses based in America we believe it is the key factor accounting for the strong performance of US indices like the Nasdaq Composite.

Our best guess is that a decade from now the US indices will be massively higher again than their present level and that now remains a wonderful time to be investing in well-chosen US shares. Choosing these stocks is our forte at Quentinvest.

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