The Bulls and Bears and Your 401(k)
Wall Street has its own jargon. Brokers call betting against the market short selling. Believing that the market will go up, selling long. To them, looking for a big company to purchase is called elephant hunting. Wall Street refers to market conditions as either bullish or bearish. The bull and bear lingo has spilled over to the outside world and it is not uncommon to hear references to bulls and bears on the nightly news. It has become so common that nobody stops to explain what the terms mean; they just assume that everybody knows what they mean.
The bull and bear terminology is so ingrained in stock market culture that there is actually a statue of a charging bull situated near the New York Stock Exchange. The stature arrived in 1989 when it was illegally dropped off right outside the exchange building. The motivation behind it came from the 1987 black Monday stock market crash. The intention was to inspire people who came into contact with it to carry on fighting through the hard times and looking forward to a brighter future.
The Reader’s Digest version of these terms is that a bull market is one where stocks are rising and a bear market is one where stocks are falling. A bull market can be weeks, months or years. The average length of a bull market is approximately 97 months. A bull market is not an exact description of the market. Rather, it is reporting on the psychology of investors in general. Rough translation, investors are optimistic and more interested in buying than they are in selling. When buying interest exceeds selling interest, the market goes up. Bull markets are most common when the economy is growing, unemployment is low and inflation is low.
When we say that we're in a bear market, we expect that stocks are headed down. This means sellers outnumber buyers. Historically, bear markets have been shorter in duration than bull markets, with an average length of 18 months. If stocks go down for just a few days or weeks, the movement is usually called a "pullback" or a "correction." Once stocks drop 20 percent from their peak and commentators will begin to speculate that we are in a bear market and prices may drop a lot farther before the market begins to climb back up again.
The terms "bear" and "bull" are believed to have come from the way that each animal attacks its opponents. A bull thrusts its horns up, while a bear swipes down with its paws. Wall Street related the action of the animals to the action of the market: if prices were going up, they called it a bull market; when prices were going down, they called it a bear market.
In today’s market, the bull and bear terminology has less relevance than it did forty years ago. Back then investor optimism or pessimism had more impact than it does today. In those days the markets buying and selling operations were made by humans with paper pads and pencils who stood face to face on the floor of an exchange. In today’s markets, an average of 80% of the trades are made between two computers, with no human involvement. At last check, computers have no emotions and minimal analytical powers. Markets continue to go up and down, but the computer driven markets are more arbitrary and less predictable than those controlled by humans.
The conventional wisdom is that investors enjoy bull markets and fear bear markets. Which probably is not too far from the truth. But if you have a 401k you have reason to enjoy both of them and dread neither of them. When the market is going up enjoy the ride. When the market is going down 401(k) investors are uniquely positioned to profit from it because their account is long term so they can’t take money out. Thus, a temporary decline is irrelevant. Over the course of last 200 years the long term market trend has always been up. In addition, 401(k) owners, and in many cases their employers, add money to the account on regular basis. When the market declines and they buy more mutual fund shares with the new money, the average cost of their portfolio declines. When the market returns to bull conditions, and it always has, their account will become profitable much sooner than it would have if the had sold and hoped to return to the market when things got better.
Bottom line, people with 401(k) accounts should look forward to both bull and bear markets.