Bull Market vs Bear Market

Have you ever heard investor friends or media personalities speaking about being bullish or bearish toward a particular asset, or that a bull or bear market was at hand? Those unfamiliar with this terminology might wonder whether the speakers were referring to some type of exotic livestock auction or safari adventure.

In reality, the bull vs. bear markets discussion is far from any dialogue pertaining to zoology. Since national and international trading came into formal existence more than two centuries ago, "bullish" and "bearish" have served as shorthand for investors to describe general sentiments among buyers and sellers about stocks, bonds and other assets that are actively traded.

Simply stated, a bull market occurs when investors show enthusiasm for buying stocks or other assets, while a bear market indicates investors are shying away from buying and looking to sell. The definitive explanation for how these terms came into existence may be lost to the dust heaps of history, though some popular theories linger about how they emerged.

Let's take a closer look at each term as it relates to the world of finance.

Bull Market

A market is said to be bullish when asset prices rise over a period of time. Given this scenario, a "buy and hold" investment strategy is appropriate. One example of a bull market occurred during the 2020/2021 rally in US real estate values. In the wake of the COVID-19 pandemic, the average US home price rose 13% from June 2020 to June 2021.[9].

Bear Market

A market is considered to be bearish when asset prices fall consistently over a period of time. Fundamentals such as a financial crisis and degrading economic conditions are common underpinnings that fuel bearish sentiment. During such a period of time, traders and investors look to limit risk exposure or actively "short the market." The dot-com bubble of the early 2000s is a famous example of a bear market. From 2000 to 2003, the tech-driven NASDAQ equities index lost 75% of its value as a severe technology market correction ensued.[10]

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History Of Bull And Bear Markets

The first written references to bears and bulls appeared in the early 1700s[1] and the first reference to bears and bulls as types of investors appeared in 1761 in a book by Thomas Mortimer called "Every Man His Own Broker; or Guide to Exchange Alley."[2]

Natural Oppoonents

One of the more often cited explanations for the term was in fact related to animals. During the early emergence of the stock market around the turn of 18th century, bearskin traders called jobbers were known to sell the skins even before they had them, speculating that they could acquire the skins from trappers at a lower price in a "bear market."[3]

At the time, bulls were considered to be common opponents to bears. This is likely due to the popular practice of bear and bull baiting, in which the two animals would be led into a ring together to do battle against one another. The fighting displayed by these animals also may have contributed to the notion; bulls were noted to advance against opponents in an upward fashion, while bears usually attacked in a downward motion. Such an explanation for the terms was even later attributed to journalist and New York Tribune founder Horace Greeley, who was said to have witnessed such a contest in California.

French Roots

The term bull market has also been traced to the French expression "bullé speculative," which translates as "speculative bubble."[4] A speculative bubble is a swift, dramatic run-up in asset pricing. Securities across the board may experience bubbles, from a well-timed initial public offering (IPO) to corn or Bitcoin. In fact, as any veteran futures or cryptocurrency trader will tell you, the crypto and commodity asset classes are certainly no stranger to speculative bubbles.

British Roots

Another explanation for the bull and bear market terminology is as follows. In the early days of the London Stock Exchange, offers to buy stocks were posted on a bulletin board at the exchange and were referred to as "bulls." Thus, when there was a large demand for shares, the board (and the market) was full of "bulls."

On the other hand, when there was little demand for shares, the board was bare, and there was a "bear market."[5] Given the modern British fondness for rhyming slang, it's not difficult to imagine how such jargon might have evolved.

Markets On The Move: Dow Theory

Whichever explanation you choose, what's most important to recall is this: a bull market signifies an upward trend in asset prices amid investor optimism, while a bear market signifies a downward trend of asset prices amid pessimism. And, what do modern analysts believe actually constitutes a bull or bear market? That definition may of course vary, depending on whom you ask.

According to followers of the Dow Theory, a compilation of ideas set forth by Wall Street Journal founder Charles Dow, and later by S.A. Nelson, William Hamilton and Robert Rhea, a bull market can be generally identified by a 20% upward movement in a broad market index, such as the Dow Jones Industrial average or the S&P 500. Conversely, a bear market would be defined as a 20% downward movement from recent highs in such indices.[6]

There isn't full agreement on how the length of a bull or bear market should be defined, but generally they are divided into "secular" or longer-term trends of 5 to 25 years, or shorter "cyclical" trends of 1 to 3 years.[7] Accepted durations do vary according to asset class and source. And, as always, past performance is not indicative of future results!

Three Stages Of Bull And Bear Markets

Theorists further believe that each bull or bear market normally undergoes three stages.[8]

Bull Market Stages

  1. During the first stage of a bull market, dubbed the accumulation stage, investors test the waters by buying until an initial peak of the market. This move is followed by a subsequent market correction and more buying until surpassing the initial peak confirms an upward trend.
  2. In the second stage, which is often the longest and largest, business conditions, earnings and stock prices improve. This builds investor confidence and encourages a broader allocation of public and private funds to the market.
  3. In the final stage, there is excessive speculation and inflationary pressures begin to appear, signalling a downturn in the market is not far off. Prominent drivers of a bearish downturn may be rising interest rates, volatile currencies and slowing growth of a country's gross domestic product (GDP).

Bear Market Stages

According to the US Financial Industry Regulatory Authority (FINRA), a bear market occurs "when a stock or bond index, or a commodity's price falls and keeps falling."[11]

Like the bull market, a bear market follows a three step progression:

  1. In the first stage of a bear market, known as the "distribution" state, investors and forecasters remain optimistic despite declines. In the wake of moderate declines, there is a secondary "reaction rally" that makes up for a portion of the declines. The reaction rally, however, peaks lower than the previous high. When the market average breaks below the previous low, a bear market is confirmed.
  2. Following this event, in the second stage, business conditions begin to deteriorate. Subsequently, revenues, earnings estimates, asset valuations and profit margins decrease, prompting sellers to enter the marketplace. Stocks, ETFs, commodities and currencies are a few examples of financial products that may be negatively impacted by a bear market.
  3. In the final stage, asset prices move toward minimums and a large swathe of investors seek to leave the market until a new bull market trend is established.

Summary

When examining the bull vs bear markets dichotomy, it's important to remember that the periodic direction of price is the crux of the argument. The bottom line is this: a bull market occurs when asset prices rise over time, while a bear market develops as prices fall over time.

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Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.

References

1

Retrieved 10 Sep 2015 http://www.worldwidewords.org/qa/qa-bul1.htm

2

Retrieved 10 Sep 2015 https://www.ifa.com/book-library/2622/Every_Man_His_Own_Broker

3

Retrieved 10 Sep 2015 https://www.lexico.com/

4

Retrieved 10 Sep 2015 http://www.self.gutenberg.org/403.6.html

5

Retrieved 10 Sep 2015 https://www.cantechletter.com/2013/05/where-do-the-stock-market-terms-bull-and-bear-come-from0516/

6

Retrieved 10 Sep 2015 https://www.wsj.com/articles/SB124501817200213499

7

Retrieved 10 Sep 2015 https://www.forbes.com/sites/advisor/2014/09/26/a-stock-market-pullback-should-fuel-the-next-leg-of-this-secular-bull-market/

8

Retrieved 10 Sep 2015 http://www.financialsense.com/sites/default/files/users/u111/pdfs/2015/dow-theory-the-key-to-stock-market.pdf

9

Retrieved 02 Nov 2021 https://www.cnbc.com/2021/06/16/typical-us-home-price-up-record-13point2percent-compared-to-last-year.html

10

Retrieved 02 Nov 2021 https://www.npr.org/sections/thetwo-way/2015/04/23/397113284/15-years-after-the-dot-com-bust-nasdaq-closes-at-new-record

11

Retrieved 02 Nov 2021 https://www.finra.org/investors/insights/key-terms-tough-times-vocabulary-stressed-markets

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