An overstated bear market, that tends to be associated with falling investor confidence and alarm selling, can show the way to a market crash associated with a recession. A blown up bull market, on the other hand, fueled by overconfidence and/or speculation can lead to a market bubble — characterized by tremendous inflation of the price/earnings P/E ratios of the stocks in that market.
Market movements may act in response to new information becoming available to the market, but may also be influenced by investors' cognitive biases and emotional biases. Expectations occupy a great part in financial markets. Over and over again there will be significant price response to financial data, information or news. surprising news or information that is perceived as positive for the economy or for a particular market sector or company will of path increase stock prices, and vice versa.
The stock market is affected by a lot of economic factors. High employment levels, strong economy, and stable social and economic conditions usually build investor confidence and encourage investors to invest their money in the stock market. Very often, this can bolster bull markets. In addition, new technologies and companies that encourage investors to invest their money in stocks can create bull markets. For an instance, in the 1990s, the dot com craze encouraged many investors to invest their money in stocks that they felt would keep increasing. In some situation, a bullish market is merely self-perpetuating. Given that the market is doing well, it only encourages investors to invest more money or to start investing in more shares.
On the other hand, discouraging economic or social-political changes in a society can pull the market down. Unexpected instability or unemployment -- or even fears of unemployment caused by wars and other problems -- can start to make investors more and more conservative type and therefore lead to bear markets.
Of course, once again this becomes typically a self-perpetuating trend. At the same time as the economy slows down, companies begin downsizing. Increased unemployment makes people far less enthusiastic to gamble on the stock market. Sometimes, an alarm caused by dire predictions about the market can also create bearish conditions.
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