What are Bull and Bear Markets?

Understanding bull and/or bear markets

It looks like investors enjoy having an animal mascot to represent market trends. The terms bull and bear markets are commonly used in investing to convey positive (bull) or negative (bear) sentiments. A bull market typically refers to a 20% increase from the market’s low point, while a bear market indicates a 20% decrease from its high point. While not set in stone, these terms can be applied to different assets, including individual stocks. Investors frequently express their optimism by claiming they are “bullish” on an industry with growth prospects or their pessimism by stating they are “bearish” on a stock.

Simple Explanation

Bull and bear markets are similar to emojis in investing…

They are basic labels that represent the ups and downs of the stock market. These words have evolved to encompass the overall feelings about stocks, markets, and industries, whether positive 😀 or negative 😩.

Where do the names come from?

People have been debating about this for a while, and there are many different opinions on why positive and negative market movements are represented by certain symbols. The main reasons that most people agree on are just nature and human history.

The “Nature” argument

While we’re not zoologists, it’s common knowledge that bulls tend to thrust upward with their horns, while bears push down with their paws. This imagery has become symbolic of market behavior – now you can easily imagine a majestic bull charging up during a stock increase, or a powerful bear striking down when the market is on a downward trend.

The “History” argument

It all started with bearskins – literal skins from bears that were highly sought after during the colonial era, along with many other animal pelts. Traders would go as far as selling bearskins they hadn’t even bought yet just to meet the demand. So, they were hoping that the cost of bearskins would decrease because they needed to purchase them to fulfill the orders. This wish for a drop in bearskin prices is what gave traders the nickname “bears.” And just like every “ying” needs a “yang,” bulls became the optimistic counterpart to bears.

Some people believe the term “bull” has more to do with finance than with the outdoors. It’s believed that the name might have originated at the London Stock Exchange, which was one of the first recognized stock exchanges in the modern era. In the 17th century, the exchange had bulletin boards that indicated market improvements, leading to the term “bull” being used as a quick way to convey the idea.

Are there any rules to defining bull and bear markets?

Nope, there isn’t a universally agreed upon, perfectly precise set of guidelines for determining whether a market is in a bull or bear phase, but there are some generally accepted numerical definitions. The most widely used benchmark for identifying a bull or bear market is the 20% rule: A bull market is declared if there’s a 20% increase in market value from a low point (also known as a trough). Conversely, a bear market is declared if there’s a 20% decrease in market value from a high point (also known as a peak).

In order to determine whether a stock or market is in bull or bear mode, you need to analyze the historical price changes of a stock or market. First, find the low point and calculate the percentage change – if it’s above 20%, it’s a bull market. On the other hand, if you look at the high point and see a percentage change decline of over 20%, it’s a bear market.

Take the S&P 500, for example. This stock index is commonly used in examples because it monitors the movements of 500 stocks, giving us a clear picture of how the broader market is behaving.

From 2007 to 2009, the S&P 500 dropped by approximately 50%, which classified it as a bear market. Then, over the next 11 years until February 2020, the S&P 500 rose by more than 300%, earning it the title of the longest bull market in history.

Both time frames meet the criteria for the bull/bear mascot combo as they rose or fell by more than 20%.

Examples of bull and bear markets in history

The modern stock market history is marked by continuous bull and bear markets, with periods of significant growth of over 20% followed by periods of decline of over 20%. Despite the overall upward trend in US stock trading history, there is a constant cycle of ups and downs. Since the end of World War II, there have been 11 bull markets, each eventually followed by a bear market response.

Recent bull and bear markets

Bull and bear markets have been around for decades, but we’ve seen some major ones in the 20th century. For example, the 2008 financial crisis was driven by speculation and unsustainable debt in the real estate market, causing a sharp decline in the stock market. The S&P 500 lost more than half of its value in just over a year, turning that period into a bear market.

Following the crisis, the government bailed out financial institutions, and businesses recovered, leading to an economic upturn in March of 2009 from the market’s low point. Over the span of 100 months, the S&P 500 has tripled in value. By early 2020 — over a decade after the crash — the US saw a significant bull market. In fact, this was the longest bull market period since World War II.

The S&P 500 experienced a major drop in February and March 2020 due to the economic chaos and uncertainty caused by the COVID-19 pandemic. However, it made a comeback thanks to government stimulus bills and positive investor sentiment, resulting in historic gains and record-breaking closing levels. The S&P 500 saw a rise of more than 54% between March and August 2020, indicating a strong bull market.

It’s worth mentioning that despite the significant increase, the National Bureau of Economic Research (NBER) declared a recession in June 2020, stating that the US economy was in contraction.

Other bull and bear markets to know

Let’s take a look at some other significant bull and bear markets (focusing on the S&P 500) and the key factors that influenced them:

• Post-WWII “Peacetime Boom” (🐂): After World War II, there was a “Peacetime Boom” where the S&P 500 went up by 85% in almost 50 months until the late 1950s, thanks to the industrialization after the war.
• Early ‘60s (🐻): The S&P 500 experienced a sharp drop of almost 30% in under a year, signaling a market slowdown. Investors were concerned that the market had grown too quickly in the previous decade.
• 1980s Corporate Action (🐂): The S&P 500 saw a significant increase thanks to deregulation, which sparked mergers, acquisitions, and a flurry of market activity that boosted corporate profits.
• 1987 Crash (🐻): The Black Monday crash was influenced by concerns about inflation and computerized trading. The S&P 500 ended up losing a third of its value in just a few months before rebounding.
• 1990s Internet 1.0 (🐂): One of the most famous bull markets in history occurred when investors began putting their money into digital companies that focused on consumers. This caused the S&P 500 to soar by nearly 417% over a decade.
• 2000 Internet Bubble Burst (🐻): The influx of money into companies lacking comprehensive business strategies led to a sudden market downturn. The initial surge of internet startups that had gone public failed to live up to the profit projections tied to their stock prices, resulting in a 37% decline in the S&P 500 within a short span of time.

What causes bull and bear markets?

Just about everything. Bull and bear markets are just indicators of how stocks are performing in general, whether they’re going up or down. Therefore, anything that influences stocks will also influence whether the market is bullish or bearish. Here are some typical factors that can trigger or mirror bull or bear markets:

• Employment: In a bull market, companies are more likely to hire new employees, leading to a stronger job market, whereas in a bear market, companies may cut jobs to save money.
• Interest Rates: The Federal Reserve could choose to keep borrowing rates low to stimulate the markets. Conversely, they could opt to raise rates to make borrowing money more expensive, which could have the effect of slowing down the economy.
• International Investment: When there’s a rise in foreign investment or a higher demand for goods from overseas, it can help the economy grow. On the other hand, a decrease in investment from another country can have a negative effect on businesses and their stocks.
• Confidence: It’s all about mindset — Investor optimism can heavily influence stock market activity. If investors believe in the economy’s direction, they’ll take actions to support that belief.

As an investor, you’ll experience both bull and bear markets. It’s a continuous cycle where bull and bear periods alternate – you’ve likely observed that bull markets are usually succeeded by bear markets, and vice versa. Investing can be emotional, just like bull and bear markets. It’s essential to recognize when emotions are at play. Understanding the significance of these markets in showing positive and negative trends is vital for successfully maneuvering through the stock market.