If you keep up with the financial press, you’ll come across terms like “bear market,” “bull market,” and “market correction.” These phrases are often used to describe the state of stock markets, but what do they really mean? And where do they originate from?
Understanding Bull and Bear Markets
A bear market occurs when share prices are falling, and it is typically defined as a situation where major stock indices, such as the S&P 500, FTSE 100, or Dow Jones Industrial Average, have dropped by 20% or more from their recent highs. A bear market can last for months or even years, often signalling a slowdown in economic growth, increased investor pessimism, and in some cases, a recession.
A market correction is similar to a bear market, but less severe. It refers to a market decline of 10% or more from a recent peak. Corrections are fairly common and can be seen as a natural part of market cycles, helping to prevent excessive speculation and unsustainable price levels.
On the other hand, a bull market describes a situation where share prices are rising, typically by 20% or more from a market’s recent low. A bull market is usually associated with strong economic growth, investor confidence, and increased corporate profits. Bull markets often follow bear markets, as economies recover from downturns and investor sentiment shifts positively.
Where Do the Terms Come From?
There are two main theories about the origins of the terms bear market and bull market:
1. The Animal Attack Theory
One of the most widely accepted explanations is based on the way the two animals attack their opponents:
- A bear swipes downward with its claws when attacking, symbolizing a downward-trending market where stock prices are falling.
- A bull, in contrast, thrusts its horns upward when charging, representing a market that is moving in an upward direction.
This simple analogy makes it easy to understand why a declining market is called a bear market, and a rising market is referred to as a bull market.
2. The 18th-Century Bearskin Traders
Another historical explanation for the term bear market dates back to the 18th century. At the time, traders in North America engaged in “short selling” bearskins. These traders, known as “bearskin jobbers,” would sell bears’ skins before they had actually obtained them, speculating that they would be able to buy them later at a lower price.
This practice of selling something before owning it (in the expectation that its price would fall) is similar to how modern-day investors engage in short selling stocks. Over time, these traders simply became known as “bears,” and the term stuck to describe a declining market.
The term bull market arose as the natural counterpart to the bear market. During the 17th and 18th centuries, bull and bear fights were a popular form of entertainment. Since a bull was seen as the opposite of a bear, the term “bull market” was eventually used to describe rising stock prices and investor optimism.
Why Do Market Trends Matter?
Understanding whether the market is in a bull or bear phase is crucial for investors, businesses, and policymakers.
- During a bull market, investors tend to be more willing to take risks, companies find it easier to raise capital, and the economy generally grows.
- In contrast, a bear market can lead to economic slowdowns, higher unemployment, and investor fear, making it a challenging time for businesses and individuals alike.
Final Thoughts
Regardless of their exact origins, the terms bull market and bear market have become fundamental to discussions about investing and economic cycles. While most investors would prefer a bull market with soaring stock prices, history has shown that markets move in cycles—meaning both bulls and bears have their time to dominate.
For business students, understanding these market conditions can help in making better financial decisions, whether you’re analysing investments, managing risks, or preparing for a career in finance.
Now, the big question is: Are we heading into a bull market or a bear market? What do you think?
