Even if you are not familiar with investing, you have probably heard the terms “bear market” and “bull market”. In stock trading, bullish or bearish markets are typical market conditions in which the prices of securities are rising or falling respectively. Both terms are used to describe the general sentiment of the market during a particular period of time.
The origins of the term “bear market” remain unclear. However, it is believed that the term was originally used by intermediaries engaging in the sale of bearskins. Hoping that the future price of the bearskins would fall, the traders were actually speculating on the future purchase price and were selling the skins before having received them. Over time, the term was introduced in the stock market for spotting out a market downturn.
A bear market is characterized by an extended period of falling stock prices, usually a period of at least two months, and widespread pessimism that causes a further negative sentiment to investors. The total value of the stock market declines sharply as a result of a decline in investor confidence. As investors anticipate further losses in the stock market, they struggle to get out of the market as soon as possible by selling their securities collectively. This causes further market losses in multiple broad market indexes, including the Standard & Poor’s 500 Index (S&P 500) and the Dow Jones Industrial Average (DJIA). As the losses grow, investors keep on unloading stocks, thus causing a further decline in the stock market, which ultimately crashes.
Bear markets typically follow an economy in recession where unemployment is high and inflationary pressures do not allow the economy to sustain any growth. A typical example of a bear market is the Wall Street Crash of 1929. Consumer spending declined as a result of declining consumer confidence. Consumers from all social classes reduced their purchases in the fear of a further decline in the stock market. Unemployment climbed above 25 percent and people lost their homes and properties that were foreclosed and re-possessed by the banks. Entering a bear market in October 1929, the stock market crash plunged the global economy into the Great Depression with a decline of 89 percent between 1929 and 1932.
If the period of falling stock prices is short, less than 2 months and immediately followed by a period of rising stock prices, then it is a correction rather than a bear market. Unlike bear markets that are stagnant with falling prices, corrections offer great entry points to a bull market.