What you will learn
- Define bull markets, bear markets, and corrections using the usual thresholds
- Measure a decline from its peak and give the move the right label
- Separate shorter cyclical moves from longer secular trends
- Explain why the exact top or bottom is so difficult to predict
Bull market and bear market are common names for long moves in market prices. They also have rough numerical definitions, so the words mean more than good or bad. The usual memory trick comes from the animals: a bull drives its horns up, while a bear swipes its paws down. Bull means rising prices. Bear means falling prices.
Bull Markets vs Bear Markets
Video created by the Finance and Quant Society on Bull and Bear markets. Be sure to watch before moving on!!
Three names for market moves
- A bull market is a sustained period of rising prices and broad optimism.
- A bear market usually means a drop of 20 percent or more from a recent peak, along with broad pessimism.
- A correction is smaller: a fall of at least 10 percent but less than 20 percent.
The 10 percent and 20 percent cutoffs are conventions, not natural laws. Still, people use them widely, and they make it easier to describe the size of a decline with a shared set of terms.
Key terms
- Bull market
- A long period when prices rise and investors are optimistic.
- Bear market
- A drop of at least 20 percent from a recent peak, usually with broad pessimism.
- Correction
- A drop of at least 10 percent but less than 20 percent from a recent peak.
- Peak
- The highest level reached before a decline. This is where you start when measuring the drop.
Measure the fall from a peak
An index reaches 5,000, then falls to 3,900. Is that a correction or a bear market?
- Find the point loss. Subtract 3,900 from 5,000. The index lost 1,100 points.
- Compare the loss with the peak. Divide 1,100 by 5,000 to get 0.22.
- Convert and classify. Multiply 0.22 by 100. The decline is 22 percent, which is greater than the 20 percent cutoff.
Why it matters: Use the most recent peak as your starting point. Your personal purchase price does not determine whether the move is called a correction or bear market.
Calculate another decline
A market reaches 4,000 and later trades at 3,480. How far has it fallen from the peak, in percentage terms?
| Name | Usual threshold | Common mood |
|---|---|---|
| Pullback or dip | A decline of less than 10 percent | Mild, common, and often ignored |
| Correction | At least 10 percent but less than 20 percent from a peak | Nervous |
| Bear market | A decline of at least 20 percent from a peak | Pessimistic and fearful |
| Bull market | A sustained rise | Optimistic |
Short cycles inside long trends
Analysts also sort market moves by length. A cyclical move lasts from months to a couple of years and follows the business cycle. A secular trend lasts many years and reflects longer-term forces, such as an extended period of technological growth. Both can happen at once. A long secular bull market can contain a shorter cyclical bear market, so the long trend may still point up even during a painful drop.
Defining bull and bear markets (J.P. Morgan)
J.P. Morgan introduces both terms and the 20 percent threshold. Good review and a great video too :)
Name the 12 percent drop
A stock index climbs for three years, then drops 12 percent from its recent high over two months before recovering. What would most analysts call that two month decline?
The index fell 12 percent from its recent peak. That sits between 10 and 20 percent, so the move is a correction.Bull and bear describe the market's direction and the mood that tends to come with it.
Why timing the turn is hard
Historically, bull markets have tended to last longer than bear markets, and markets have generally risen over long periods. That pattern is not a promise about the future. No one can reliably predict the moment a bull market will become a bear market, or when a bear market will turn back up. Waiting in cash for a decline also has a cost because you miss any gains that happen while you wait. The behavioral finance unit returns to this problem when it covers market timing.
How would you handle a bear market?
Market turning points are hard to predict. During a frightening bear market, would you sell, hold, or continue investing on a schedule? There is no single correct choice, so explain your thinking.
Write an answer before comparing it with the model response.
Model answer
Many long term investors hold their positions or keep buying on a schedule because no one can reliably identify the bottom. Selling out of fear can lock in losses and leave you out of a recovery that may arrive quickly and without warning. Your own choice also depends on when you need the money and how much volatility you can tolerate.
You can now measure a market decline and choose the usual label for it. The next lesson moves to the tradeoff behind every investment decision: risk and return.