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What are bull and bear markets?

Jack and Nick Author Pic
Jack Kramer & Nick MartellNovember 11, 2019
Forbes 30 Under 30 in media, appeared on CBS, Cheddar. Registered representatives of Robinhood Financial LLC.
definition

Bull markets describe a period of growth for a stock, an industry, entire markets, while bear markets reflect a decline.

🤔Understanding bull and/or bear markets

Do investors appreciate a good animal mascot? Seems like it. Bull and bear markets are key investing lingo and symbols, capturing positive feelings (bull) or negative ones (bear). There’s no official rule, but a bull market tends to refer to a 20% increase in a market over time from its bottom, while a bear represents a 20% decrease from its top. In general, “bull” positivity or “bear” negativity can refer to upward or downward movements of almost anything, like individual stocks. And you’ll even notice investors saying they’re “bullish” on an industry with growth potential or “bearish” on a stock they think will drop.

example

Driven by the first wave of the internet boom, the 1990s became a famous bull market — The S&P 500 stock index rose 418% from October 1990 to March 2000 before dropping. That’s when things got bearish, with the S&P 500 falling 40% through September 2002.

Takeaway

Bull and bear markets are like the emojis of investing...

They’re simplified labels to describe market movements up or down over time. You’ll notice the words’ meanings have expanded to capture the general sentiment of stocks, markets, industries, or even just investor feelings of optimism or pessimism. 😀😩

Bear Bull

Tell me more...

Where do the names come from?
Are there any rules to defining bull and bear markets?
Examples of bull/bear markets in history
What causes bull and bear markets?
What should you do as an investor?

Where do the names come from?

There’s a lot of debate here, and plenty of perspectives on how positive and negative market movements earned such visual mascots. The most commonly accepted reasons are simply nature and human history.

The “Nature” argument We’re not zoologists, but bulls tend to use their horns to thrust upward, while bears push down with their paws. That imagery has become symbolic of the movements of the market — Now you can just picture a majestic bull lunging up when a stock is rising, or a powerful bear smacking down when a market falls over time.

The “History” argument This one starts with bearskins — We’re talking literal skins of bears that were a bustling trade in the colonial era along with plenty of other animal pelts. Traders would sometimes sell bearskins that they hadn’t yet purchased to keep up with demand. As a result, they’d then hope the price of bearskins would fall since they would have to buy them to satisfy the orders. That desire for a bearskin price drop led traders to earn the nickname “bears.” Every “ying” needs a “yang,” so bulls became the positive bears’ counterpart.

Some even think the name has more finance-focused origins than outdoor ones. Instead of referencing an animal, the term “bull” may have originated at the London Stock Exchange. One of the first formally recognized stock exchanges in the modern world, London’s 17th century exchange featured a board of bulletins that could signal when a market had improved — and “bull” became quick short-hand for the concept.

Are there any rules to defining bull and bear markets?

Not exactly. There’s no specific, globally-accepted, perfectly calculated rulebook on what number precisely determines a bull or bear market, but there are some generally accepted quantitative definitions. The most commonly used measurement of a bull or bear market is the 20% rule: A bull market occurs if there’s a 20% rise in markets from a low-point (aka a trough). For a bear market, it’s a 20% drop for markets from a high-point (aka a peak).

That means you’ve got to look back on a stock or market’s historical price changes to determine if it’s in bull or bear mode. To start, you have to identify the stock or the market’s low point and then find the percentage change — If it’s above 20%, then that period is a bull market. If you identify the market’s high point and then look at its percentage change decline from there and it’s over 20%, then it’s a bear market period.

For instance, let’s check out the S&P 500. We often use this stock index for examples because it captures the movements of 500 stocks, so it’s a helpful reflection of how the broader market is moving.

  • From 2007 to 2009, the S&P 500 fell about 50%, so we call it a bear market.
  • Then for the next 9 years from 2009 through 2018, the S&P 500 rose by more than 300%, so we call it a bull market.

Both periods earn the bull/bear mascot combo because they grew or fell by over 20%.

Examples of bull/bear markets in history

Modern stock market history is defined by ongoing bull and bear periods — eras of booms and busts in which stocks are in general rising by over 20% and then periods where they fall over 20%. While you’ll noticed stocks have generally moved higher over the history of US stock trading, there is a non-stop cycle between periods of ups or downs. Investors have enjoyed 11 bull markets since the end of World War II, each accompanied by an eventual bear market response.

Recent bull and bear markets While bull and bear markets track back for decades, we’ve already experienced a couple key ones in the 20th century. For example, the 2008 financial crisis was driven by mostly by speculation and unsustainable debt in the real estate market, causing the stock market to rapidly drop. The S&P 500 lost over half its value in just over a year — That was enough to turn a short period of time in the stock market’s history into a bear.

As the crisis faded, the government bailed out financial institutions, and businesses rebounded, an economic recovery began in March of 2009 from the market’s low-point (aka a trough). In the over 100 months since then, the S&P 500 has tripled in value. So as of the beginning of 2019 — a decade after the bottom of the crash — the US has experienced a significant bull market. In fact, this has been the longest bull market period since World War II.

Other bull and bear markets to know Here are some other major bull and bear markets to keep in mind (we’ll continue with our S&P 500 example) and some of the driving forces that powered them:

  • Post-WWII “Peacetime Boom” (Bull): The S&P 500 rose 85% over nearly 50 months through the end of the 1950s, powered by post-war industrialization.
  • Early ‘60s (Bear): The S&P 500 fell nearly 30% in less than a year as the market cooled down — Investors simply thought the market had grown too fast over the previous decade.
  • 1980s Corporate Action (Bull): The S&P 500 more than doubled as deregulation led to mergers, acquisitions, and flurries of market activity powering corporate profits.
  • 1987 Crash (Bear): Worries about inflation and the computerized trading contributed to the famous Black Monday crash. The S&P 500 ultimately lost a third of its value in just a few months before recovering.
  • 1990s Internet 1.0 (Bull): The most famous and one of the longest bull runs before the current one, investment in the first consumer-focused digital companies with the adoption of the internet led to the S&P 500 rising nearly 417% over the decade.
  • 2000 Internet Bubble Burst (Bear): The rush of cash into businesses without complete business plans resulted in sudden market contraction. The first wave of internet startups that had IPO’d couldn’t deliver the profits their stock prices reflected, causing the S&P 500 to lose 37% of its value in less than two years.

What causes bull and bear markets?

Almost anything. Bull and bear markets are simply the reflections of how stocks are moving in general, up or down — So whatever affects stocks also affects whether a market is a bull or a bear. Here are some common market-moving forces that can cause or simply reflect bull or bear markets:

  • Employment: Tends to be higher during a bull market as companies hire more, but lower in a bear market as companies let go of workers to cut costs.
  • Interest Rates: The Federal Reserve may keep borrowing rates low to push markets up. Or the Fed may increase rates to make borrowing money more expensive, which can slow down the economy.
  • International Investment: A surge in foreign investment or demand for goods from a foreign country can grow an economy. But a cutback in investment from another country can hurt business and affect their stocks.
  • Confidence: Mind over matter — Investor enthusiasm can be a key driver to buying or selling stocks, which drives market movements. If investors have cash and think the economy is moving in the right or wrong direction, they’ll make moves that could strengthen that trend.

What should you do as an investor?

As an investor, bull and bear markets happen. And there’s an ongoing back-and-forth, complementary, totally-related cycle of bull or bear periods (you’ve probably noticed here that bull markets tend to be followed by bear markets, and vice-versa). Bull and bear markets are the emojis of investing because investors get emotional — And should do their best to recognize when that’s happening. Understanding how bull and bear markets reflect positive and negative trends is key to keep in your vocabulary as you navigate your way through the stock market. One helpful resources when you’re experiencing intense market movements is the Securities & Exchange Commission’s (SEC) “investor.gov” fundamentals of investing to stay on top of.

Disclosure: It is not possible to invest directly in a market index. Indices are not subject to any fees or expenses.

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