Share markets move in long waves of optimism and fear. Here’s what bull and bear markets are, where the names come from, and what history says about riding them out.
Bull and bear markets are terms used to describe the big, sustained movements in share prices.
A bull market is a period when prices are rising and investors are optimistic. A bear market is a period of falling prices and pessimism. The usual definition of a bear market is a fall of 20% or more from a recent peak in a major index, such as the ASX 200 or the U.S. S&P 500.
The names are often explained by how each animal attacks: a bull thrusts its horns upward, while a bear swipes its paws downward.
Corrections and crashes
A smaller fall, of between 10% and 20%, is called a correction. Corrections happen fairly often and don’t always turn into bear markets.
A crash is a sudden, very sharp fall over a short period, such as a single day or a few weeks. The most famous examples include the 1929 Wall Street crash, Black Monday in 1987 and the plunge in March 2020 when the COVID-19 pandemic hit.
What causes them
Bull markets are usually driven by strong economic growth, rising company profits, low or falling interest rates and investor confidence.
Bear markets often come with recessions, rising interest rates, financial crises or major shocks. The global financial crisis in 2008 and 2009 caused one of the deepest bear markets in modern history, with Australian shares losing more than half their value from their peak.
What history shows
Over the long term, share markets have risen far more often than they have fallen. Bull markets have historically lasted several years, while bear markets have usually been much shorter, often a year or so, although recoveries can take longer.
That’s one reason financial advisers caution against trying to time the market by selling when prices fall and buying back later. Some of the best days for share markets have come in the middle of bear markets, and investors who miss them can significantly reduce their returns.
For long-term investors, such as most people with superannuation, bear markets are painful but have historically been temporary. For people close to retirement, though, a big fall can matter much more, which is why many super funds move members into more conservative investments as they age.
You’ll also hear investors described as “bullish” when they expect prices to rise and “bearish” when they expect them to fall, about a single share, a commodity or the whole market.
