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What Are Bear and Bull Markets?

Say What Series Investment Basics

Almost every day in the investing world, you will hear terms "bull" and "bear" to describe  market conditions. But what exactly do these terms mean and where did the names come from?

The Bulls

A bull market is when the market is showing confidence. Everything in the economy is going great, people are finding jobs, gross domestic product (GDP) is growing and stocks are rising. We see strong demand and weak supply for securities. In other words, many investors are wishing to buy securities while few are willing to sell. As a result, share prices will rise as investors compete to obtain available equity. Bull markets cannot last forever, though. While a market can be a bull market an investor can also be said to have a "bullish outlook." For example, if someone has a bullish outlook towards a certain stock, say Home Depot (HD), that means they assume the stock price will continue to rise. Such recommendations will often lead general investors towards purchasing stock in the company, expecting the stock price to soar. Be cautious with advice you hear on TV or online, as in some cases the "experts" might own the stock they are recommending. A disclosure will be made, but the idea they will benefit if you buy on their recommendations must be considered. 

The Bears

A bear market is when the economy is not doing well. Recession is looming and stock prices are falling. The assumption is that stocks will fall in price. During a bear market, market sentiment is negative as investors are beginning to move their money out of equities and into fixed-income securities until there is a positive move. In sum, the decline in stock market prices shakes investor confidence, which causes investors to keep their money out of the market - which, in turn, causes the decline in the stock market. In the same way, someone on TV or online would offer a recommendation of feeling bullish about a stock, they can recommend a bearish feeling towards a stock. A bearish feeling may not even need to occur in a bear market. Such a recommendation can be made due to the performance of the stock over time, issues with the company, or short selling of the stock

History

The origins of the terms "bull" and "bear" are unclear, but here are the two most common explanations:

  1. The bear and bull markets are named after the way in which each animal attacks its victims. It is characteristic of the bull to drive its horns up into the air, while a bear, on the other hand, like the market that bears its name, will swipe its paws downward upon its unfortunate prey. Furthermore, bears and bulls were literally once fierce opponents when it was popular to put bulls and bears into the arena for a fight match. Matches using bulls and bears (whether together or against other animals) took place in the Elizabethan era in London and were also a popular spectator sport in ancient Rome.   
  2. Historically, the middleman who were involved in the sale of bearskins would sell skins that they had not yet received and, as such, these middlemen were the first short sellers. After promising their customers to deliver the paid-for bearskins, these middlemen would hope that the near-future purchase price of the skins from the trappers would decrease from the current market price. If the decrease occurred, the middlemen would make a personal profit from the spread between the price for which they had sold the skins and the price at which they later bought the skins from the trappers. These middlemen became known as bears, short for "bearskin jobbers", and the term stuck for describing a person who expects or hopes for a decrease in the market.

Takeaways

An important thing to keep in mind when you hear TV commentators or see bold headlines on the internet in regards to bull or bear markets is that there could be an ulterior motive. Far too often we receive calls from clients who read an article online or heard someone on CNBC say that it's a bear market and the sky is falling. These commentators scare their viewers into wanting to sell all of their investments. We want to remind you that as your financial advisor we see your full financial picture. We know what your goals are, your objectives, and your risk tolerance. We have a relationship with you and we are constantly monitoring your accounts for YOUR best interest. The more people tune into the high drama commentators the more viewership they gain which increases their sponsorship and revenue. We understand that it is not just your money that is invested; it is everything you have worked for and earned. We encourage you to call us if you hear commentary that makes you uneasy but urge you to not make any knee jerk reactions based on advice that you are given from someone who does not see your full financial picture. As you hear us say all the time, our crystal ball is broken and we do not have a magic wand but we are constantly monitoring your accounts and determining the best course of action.