Bear and bull markets have been frequently discussed in recent months as the United States has been facing higher unemployment and rising interest rates, and many economists argue whether the U.S. has moved into bear market territory. These terms generally describe how the markets are doing and whether they are performing above or below expectations, but can also refer to anything that is traded – bonds, real estate, currencies, commodities, and private equity. So, what are bear and bull markets and what are some of the indicators of each type of market?
Merriam-Webster states the origin of “bull” and “bear” markets as a literary proverb. The proverb warning states it is not wise “to sell the bearskin before one has caught the bear”. Bear comes from “bearskin jobber”, or someone who sold bearskins. The phrase “bear” became widely popularized through the South Sea Bubble in the early 1700s, where the South Sea Company would trade with Spain’s colonies in the New World. Stock in the South Sea Company was extremely profitable, and stockholders were receiving returns up to 100%. However, once the company assumed most of the British national debt, many speculators were selling stocks they didn’t own, which resulted in a stock crash.
The ”bull” came later, and while the original use cases are unknown, many literary works use a bull as an alter ego to the bear. In 1720 the poet Alexander Pope wrote:
Come fill the South Sea goblet full;
The gods shall of our stock take care:
Europa pleased accepts the Bull,
And Jove with joy puts off the Bear.
The selling of the bearskins and the selling of securities in the face of economic downturn coincided to make “bear” a more regular term in the today’s vernacular, with the equivalent “bull” to represent the positive nature of economic upswings.
What is a Bull Market?
The term “bull market” is generally used to describe rising and favorable market conditions. Bull markets are characterized by a sustained increase in stock price, low unemployment rates, high gross domestic product (GDP), and a strong economy. In the markets, a bull market may be characterized by a rise in the price of the companies’ shares, typically around 20% or more over a two-month span. In bull markets, investor confidence is usually high which in turn has the ability to help further strengthen the market conditions. It is difficult to predict when bull markets can occur, and there is not a universally specific metric used to identify bull markets, but the key indicators listed above can help provide insight into the conditions of the market.
What is a Bear Market?
On the other hand, “bear markets” can be sustained periods of economic decline, where investment prices have dropped for a continuous amount of time, usually a decrease of 20% or more over a two-month span. Characterized by higher unemployment, lower stock prices, a weaker economy, bear markets can be triggered by specific events that cause market fluctuations. Natural disasters, wars, government policies, concerns over inflation and deflation, and rising interest rates can have an impact on the markets and push them towards a bear market. Investors’ attitudes and public perception of the market may affect market conditions, which can further deepen the bear market.
Bull and bear markets can be either secular or cyclical. Secular markets are usually long term and can last anywhere from 10 to 20 years. There are likely to be rallies within a longer-term secular bear market with some upswings, but without a sustained economic upturn, it can remain in a bear market. Cyclical markets are shorter term, typically lasting from a few weeks up to several months.
Historically, markets increase and decrease at different levels, for different periods, and for different reasons. Bull and bear markets are qualitative descriptions to the trends to help understand the patterns of the market. They are representative of the cyclical nature of the markets in general.
Investors should be aware the increases and decreases in price seen in both markets are arbitrary numbers and should not be used as absolutes when understanding bear and bull markets. In addition, investor sentiment can affect the markets both positively and negatively. If an investor sees the stock price dropping, gets anxious about future growth, and decides to sell, they potentially could further the stock price drop. On the other hand, if an investor sees the stock price rising and decides to buy, they potentially could contribute to increasing the stock price.
At their core, bull and bear markets are just descriptors of the different markets and are based off arbitrary metrics, which makes them hard to identify, but the key indicators can help provide insight as to which type of market may be occurring.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.