Da Bears, Da Bulls

Question:  What are the meaning and origins of the terms “Bull” and “Bear” Markets? 

Answer: A standard definition is that a bear market occurs when financial markets experience declines of 15-20% for more than two months. Bull markets occur when there are positive trends of 15-20% for more than two months. These Wall Street terms date back to a common lore that bulls attack their prey with an upward strike of their horns, while bears claw their opponents in a downward fashion, bulls for up markets and bears for down markets. As you can see, Wall Street jargon isn’t terribly sophisticated.

Here are a few things to watch for with market activity and terminology:

1. Measurements are from peak to trough, so a stock index officially reaches bear territory when the closing price drops at least 20% from its most recent high. A “correction” is a drop of 10% - 19.9% and a new bull market begins when the losing price is up 20% from its low. 

2. On average, in a bear market, stocks decline 36%. During a bull market there is typically a gain of 114% on average. 

3. We all need to take a rest occasionally, meaning that bear markets are normal. Since 1928, there have been 26 bear markets. There have also been 27 bull markets since then with stocks rising significantly over the long-term.

4. Bear markets tend to be short-lived with the average length being 289 days or 9.6 months. In contrast, bull markets average 991 days or 2.7 years.

5. The long-term average frequency between bear markets is 3.6 years. The longest running bull market was from December 1987 until the dot-com crash in March 2020.

6. Since World War II, bear markets have been less frequent. Between 1928 and 1945 there were 12 bear markets, or one about every 1.4 years. Since 1945, there have been 14, or one about every 5.4 years.

7. One-half of the S&P 500 Index’s strongest days in the last twenty years took place during a bear market. In addition, 34% of the market’s best days took place in the first two months of a bull market before it was clear that a bull market had begun. The moral of the story is that the best way to weather a downturn could be to stay invested since it’s difficult to time the market’s recovery.

8. Bear markets don’t necessarily indicate a recession. Since 1929, of the 26 bear markets, there have been only 15 recessions during that time. Bear markets often go hand in hand with a slowing economy, but slowed growth is still growth, not always indicating that a recession is on the horizon.

9. Looking at a 50-year investment horizon, you can expect to experience about 14 bear markets. It is difficult to watch your portfolio dip with the market, but it is important to keep in mind that downturns have always been a temporary part of the process.

10. Put another way, stocks have risen 78% of the time over the last 92 years of market history. Bear markets can be painful, making the significance of having a financial plan in place even more essential. Cash, bonds, and stocks in an appropriate mix for personal needs and matched to risk appetite are suggested.

Whether growth continues, slows, or accelerates from here will depend upon inventories, trade reports, orders for durable goods, consumer consumption and industrial production. Other influencing factors include business’ investment in construction, equipment, infrastructure, and military spending. Revenue and earnings are what matter in the long run. It may be time to fine-tune your goals and asset allocation to help you stay the course over the long-term. Having a disciplined strategy is a helpful way to offer practical perspective to weather market volatility. Stay focused and invest accordingly. 

The opinions expressed are those of the writer as of January 16, 2021, but not necessarily those of Raymond James and Associates, and subject to change at any time. S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks. Source for bear/bull market stats is Ned Davis Research as of 12/15/21. Investing involves risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in declining market. This material is provided for educational purposes only. Past performance is no guarantee of future results. Material is provided for informational purposes. Consult your tax professional and financial advisor before making any investment decisions or bond purchases. Bond risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Stocks are appropriate for investors who have a more aggressive investment objective, since they fluctuate in value and involve risks including the possible loss of capital. Dividends will fluctuate and are not guaranteed. 

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