If you’re at all familiar with economics, you’ve likely heard the term “bear market” used at some point. But what does this phrase even mean, and where did it come from? Furthermore, what does it have to do with bears? Let’s examine this unique term’s meaning and history below, as well as some interesting facts about bear markets and how they work. We’ll also compare the term to its counterpart, a bull market, and what that entails.
What is a Bear Market?
To put it simply, a bear market is a term for a particular market trend where prices drop significantly for an extended period of time. Specifically, this animal-themed figure of speech is most commonly used to describe a major S&P 500 trend in which stocks’ closing prices decline by at least 20% from their latest high over at least two months. On average, stocks lose around 35% of their value in a typical bear market, though this figure can vary significantly.
Bear markets can have many causes, from market bubbles suddenly bursting to geopolitical crises like wars and other major conflicts to health crises like the COVID-19 pandemic and increased rates of other viral diseases. Oftentimes, a bear market will have multiple contributing factors that compound each other rather than one single cause.
Historically, many other factors have contributed to bear markets, most recently the rise in online shopping and a trend towards an online economy in general. Economic recessions, rises in inflation, low wage rates, and high unemployment rates also commonly trigger them.
Notably, bear markets can be incredibly unpredictable due to the very sudden and often varied factors that cause them. This makes investing during them risky. Bear markets are often further exacerbated by large numbers of investors selling their stocks at the same time, in turn causing stock prices to continue declining.
Rather than panic selling stocks, it can be preferable to hold onto them during a bear market until conditions improve. However, this can also be risky for investors, as well as time-consuming, as they wait for market trends and the factors influencing them to shift once more.
Where Did the Term “Bear Market” Originate?
Though the term “bear market” seems modern as far as its current meaning and usage, it actually dates back to the 1700s! It originated with London’s historic Exchange Alley, an alleyway that was a hub for merchants selling their wares. The alleyway connected London’s Royal Exchange, another major center for commerce during the United Kingdom’s Elizabethan and Georgian eras, with the nearby Lombard Street’s post office. Merchants would commonly set up shop in and around the alley’s coffeehouses.
At the height of Exchange Alley’s popularity, many merchants engaged in a practice known as naked short selling to maximize their profits as quickly as possible. Naked short selling involves selling products or assets before actually having the product or asset in one’s possession.
Essentially, these hasty and unscrupulous sellers would obtain their wares on credit from another merchant, sell them to someone else, then pay back the person or business they originally purchased the items from with the money from the sale. This often resulted in FTD’s, or failures to deliver the product to the buyer in a timely manner.
Merchants engaged in naked short selling were called “bear-skin jobbers.” This referenced a well-known proverb at the time that warned not to sell a bear’s skin before actually catching the bear. A more modern and commonly used idiom for this practice would be “don’t count your chickens before they hatch.”
This is where the term “bear market” originated. Over time, it came to define markets with a disproportionately high number of sellers to buyers, with many sellers involved in naked short selling. Eventually, it evolved further into its current meaning: a market trend characterized by stocks losing 20%+ of their value over a short period.
Bear Markets vs. Bull Markets
If a bear market occurs when stocks lose their value, then what is the opposite? That would be a bull market: an upward market trend in which stocks gain value and increase in price. Specifically, this similarly animal-themed term refers to a period in which stocks’ prices rise by at least 20% from their most recent low, usually within a fairly short period of time.
The term “bull market” has much more uncertain origins than “bear market,” but it likely is simply a reference to how bulls tend to attack or strike when provoked: by running and jabbing their horns upward.
Investors generally view bull markets as a prime opportunity to invest, ideally as early as possible when prices begin their upward trajectory. By buying a stock early and holding onto it as it continues to rise, an investor can maximize their profits by selling at the right time, ideally just before prices begin falling again.
Interestingly, bull markets tend to be much longer-lasting than bear markets. While the typical bear market only lasts around 8 to 14 months, bull markets usually last for two to four years. However, gains in a bull market are usually lower than the losses in a bear market. While average annual gains in a bull market are around 15% to 35%, the average annual losses in a bear market are around 20% to 47%.
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