Bear and Bull

You often hear the terms ‘bear’ and ‘bull’ discussed in the financial world. “I have a bull outlook for the S&P 500” or “I’m bearish about that investment opportunity” are common uses of the terms. So what do two animals have to do with finance? In summary, a bull market is an indication of economic stability and prosperity. A bear market is an indication of falling prices and a generally pessimistic outlook.

What is a bullish market?

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” Sir John Templeton

A Bull Market is exactly the opposite to a bear market – per definition, the term describes the constant rising or increasing overall price movement of a market or where stocks have increased by at least 20%. If you say that your outlook for the market is ‘bullish,’ you mean that your outlook is a positive one. During bull markets, investors are optimistic and losses are normally temporary.

Gains can be made by buying early and selling when price levels reach their peak (although this is difficult to determine). Bull markets can’t generally be predicted as they can be caused by a variety of reasons. However, there are normally warning signs far in advance before a bull market ends.

What is a bearish market?

“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.” – Jack Bogle

A Bear Market is a term used to describe the constant falling or declining overall price movement of a market. If your market outlook is ‘bearish,’ you mean that your outlook is negative.

Per definition, a bear market begins when the market falls 20% below its peak over the course of at least two months. If this downturn lasts less than two months, it is known as a correction. A bear market can be compared to an earthquake – it doesn’t last long, but can leave lasting negative impressions.

Bear markets are like black swan events in that they are often difficult to predict. Gains can be made in this type of market by short selling.

History behind the terms

No one is exactly sure how “bear” and “bull” became part of the financial world, but there are several theories. One theory is that the terms derive from the way both animals fight. A bull moves its horns upward when attacking the enemy, representing an upward market. Bears swipe downwards – hence representing a falling market.

The most popular theory as to where the term ‘bear’ originates dates back to the 16th-century proverb, “Don’t sell the bear’s skin before you’ve killed him,” meaning don’t sell something before you own it. Middlemen fur traders known as ‘jobbers’ would sell bearskins before actually owning them. They estimated the price they’d have to pay the trapper, hoping for a downturn in the market so they could profit from the difference.

Bears and bulls were also used in games in the early 1500s to fight against each other. These events were known as “bear baiting” and “bull baiting.”

History of the market

America’s most famous bear market was the stock market crash in 1929 which started the Great Depression that affected capitalist economies globally. Another was during October 2007 to March 2009. This period became known as the Great Recession. The sharp decline in economic activity began in the U.S. after the housing bubble burst and then spread throughout the rest of the world.

The most famous bull market includes the strong economy between the 1980s and 1990s. This bull market lasted for 12 years and between 1987 and 2000, the market experienced a 582% gain, due in part to the technological boom.

For almost nine years, the world has experienced another bull run – the second longest in history. In December 2017, the global market cap exceeded $80 trillion. Some investors believe that this trend indicates a global looming bear market as a similar scenario was seen right before the Great Depression.

The bottom line

Bull markets tend to last a longer period. Although a bear market occurs over a shorter time period, it slows economic growth and creates a negative economic perception even after it has ended.

Profits can be made in bull markets by going long (buy). Profits can be made in bear markets by going short (sell). A positive aspect to Spread Betting/CFD trading is that you can participate in rising or falling markets – or bullish and bearish markets.

You can review the content from this article in the infographic below:

The above-mentioned market views and content reflect only the opinion of the author, not that of ayondo. This service is for informational purposes only and does not constitute advice or investment advice.

« Back to the ayondo Blog