What Is a Bull Market vs. a Bear Market? It’s Not Just About Prices

If you listen to enough popular investor-speak, you’ll notice that people tend to lump market-related matters into one of two categories: bullish or bearish. It’s as if everything that takes place in the markets happens under the gaze of these two mythical icons: the bull and the bear.

As two of Wall Street’s most prevalent figures, the bull and the bear represent two sides of the market cycle: a rising market (bull), and a declining market (bear). For many, they symbolize the perpetual struggle between opposing market forces:

• up vs. down
• buying vs.selling
• economic expansion vs. economic contraction
• market optimism vs. market pessimism

Bull and Bear Market Definitions

Differentiating the two concepts may seem pretty simple. And to a certain extent, it is. But what are the more detailed characteristics of a bull versus a bear market?

Digging deeper might initially lead you into vague territory. For example, if you did a quick Internet search for definitions, you might learn that bulls are marked by rising prices, encouraging buying, and bears are marked by decreasing prices, encouraging selling. That’s a fine start. But let’s get a little more specific.

First off, a bullish market isn’t necessarily a full-blown bull, and a bearish market isn’t necessarily a full-blown bear. You’ve probably heard these terms thrown around to describe price movements: “That stock’s price action is bullish,” or “The forecast for this sector is bearish.” 

But when people use these terms, are they referring to the market in general, or are they talking about a specific stock, sector, industry, or asset class? In other words, can a segment of a market be “bullish” in a down market or “bearish” in an up market? The answer is yes, and this may cause some confusion among investors.

Let’s break it down with an example.

Bearish Scare: Bull Dressed as Bear

Stock prices rise during a bull run. But their rise typically doesn’t follow a straight line—in fact, it almost never does. Instead, prices zigzag upward. They go up and down, and at times, these fluctuations can be extremely volatile. But in the end, in a bull market, values rise more than they fall.

When stocks fall during a bull, the dip is called a “correction.” But the thing about corrections is that while they’re happening, you can never be sure if the stock will, in fact, recover. To make matters worse, some corrections can be sudden and exceedingly steep, plunging by 10% or more. In short, they can be frightening.

But although corrections are “bearish” events, they don’t necessarily indicate the onset of a down market. It’s said that a bull market climbs a “wall of worry,” which refers to the corrections that may breed fear among investors—causing a few to unload their assets—during the course of a rising market.

But if the terms “bearish” or “bullish” can be used to describe market movement without designating a genuine bear or bull market, what constitutes the real thing?

What Is a Bull Market?

A bull run can be defined as a period of sustained and fundamentally driven growth in share values. Such markets are typically associated with a strengthening economy, an increased demand for securities, and widespread positive investor sentiment.

• Strengthening economy. When the economy is doing well, employment levels are generally high, and people have more money to spend. When consumer buying ramps up, businesses tend to do well as their profits increase. Positive earnings growth tends to attract investors. And with revenue increasing through sales and investment money pouring in, companies can choose to expand by hiring more workers, investing in new projects, resources, or infrastructure, or they can take other steps to further secure or expand their operations.
• Increased demand for securities. In a bull market, investors’ demand for stock shares increases. When demand increases relative to supply, investors may be willing to pay higher prices to buy shares. When enough investors successively bid up prices to buy shares, the stock price tends to rise. Here’s another way to look at it: during the course of an up market, investors are willing to successively “pay more” for every dollar of earnings that a company generates. This may increase a stock’s price-to-earnings ratio (P/E). Hence, bulls are often considered periods of P/E expansion.
• Positive investor sentiment. Bull runs are generally characterized as periods of optimism in which investors expect market uptrends to continue.

What Is a Bear Market?

A bear market is commonly defined as a fundamentally driven market decline of 20% or more. Such a market may coincide with a weakening economy, significant liquidation of securities, and widespread negative investor sentiment.

• Weakening economy. In a weak economy—which may or may not fall into a recession (recessions and bears don’t always coincide)—consumer spending decreases, in turn reducing business earnings. A decline in earnings can negatively affect investors’ valuations of stocks.
• Liquidation of securities. When more shares are sold than bought, stock prices fall in value. Their price-to-earnings ratio declining, stocks undergo a period of P/E contraction. Should the overall market depreciate in value by 20% or more, it may be a true bear.
• Negative investor sentiment. As share prices decline, such markets tend to generate fear among investors. Some may sell their stocks for cash or fixed-income securities; others may feel discouraged from participating in the markets at all.

Market trends—bull and bear—can be difficult to identify, let alone predict. (In fact, prediction can be nearly impossible.) But get a grasp of the nuances in addition to the basics, and you might better differentiate a genuine bull from a genuine bear.