Bullish and bearish markets

Lea Katunaric at Team UMushroom

10 Aug 2022

A simple guide to understanding the differences

Introduction

The vocabulary of the stock market has developed a lot over the decades. It is filled with fancy abbreviations and seemingly meaningless expressions, which can make a beginner question his will to continue investing. Among this jungle of colloquialisms and definitions, there are two expressions that are quintessential to the whole market ecosystem. The terms in question are, of course, “Bearish” and “Bullish” markets.

What are these trends?

In essence, these animals are used to describe opposing market conditions. When the market is referred to as bullish it means that stocks (in general) are appreciating in value, which can also be a sign that the economy is sound and growing. On the other hand, a bearish market is defined as a period in which the average value of stock decreases. This also often means that the economy is slowing down or receding. There is a quantitative way to distinguish one from the other. As a general rule, the market is considered truly bearish when it falls below 20% from its last peak. On the contrary, a bull market is established when the market recovers 20% from a recent bottom. It is important to understand that often the market is neither bear nor bull; the short trends are simply fluctuations of a slowly growing market.

How it affects the economy

As the market is generally correlated with the economy, the terms bullish and bearish also tend to reflect the general outlook of the country. When a market is bullish, its economy is expected to strengthen or maintain its strength. However, in a bearish market, companies lose value, and investors tremble and perpetuate losses, often signalling a recession.

What to do in each case

On average, it is far less risky to invest in a bull market and investors seize this opportunity. Investing in the bull market is plain and straightforward; on average stocks will grow in value. It is much harder to navigate through a bear market; they are very volatile, and stock generally falls in value. It is possible to take advantage of this decrease by shorting stocks or squeezing returns on short bursts of bullishness, but the risks of such an approach are high. It is also sensible in uncertain times to divert cash into defensive stocks. These are usually companies (likely government-owned) that provide services which are always in high demand. Utility services, for example. That being said, history has shown that markets tend towards growth over a long enough timeframe. So statistically, an investment into a market index, in spite of being a disaster through a bear market, is likely to grow over time.

Origin of the terms

The definite roots of the words bear and bull in the market context are unclear, although there are two main hypotheses. One is the metaphor for how each animal attacks its victim: a bear would strike it down with claws, and a bull would charge at the prey and lift it on its horns. This closely resembles the concept of bear and bull being used in the market sense.

The second possible origin is related to a long-gone occupation called a bearskin jobber (shortly “Bears”). These people would sell skin they have yet to receive, speculating on its future price: hoping for it to drop. Hence, the word bear is used to describe a downturn in the market.

Bottom line

To summarise, investor behaviour dramatically changes between bull and bear markets. Although, at the end of the day, a balanced, diversified, well-rounded portfolio is likely to perform reasonably well under any circumstances: the market tends towards growth over a long enough time period!

Disclaimer: This is not investment advice.