In their commonly accepted definitions, a bear market occurs when prices drop by 20% or more from recent highs, while a bull market occurs when prices rise by 20% or more from recent lows. However, these terms are now often used to describe the current market direction.
Where did these terms come from? It’s thought to have something to do with the ways bulls and bears attack their opponents – bears swipe downwards while bulls thrust their horns upwards.
While there are many factors at play, bull and bear markets are both driven by a combination of economic conditions and investor sentiment. Rising unemployment, falling incomes, weak productivity growth and sluggish profits are all potential signs that a bear market may be imminent, while the conditions you’d expect to find during a bull market include a strong or improving jobs market, rising productivity and profits and greater household disposable income.
However, because markets tend to be forward-looking, bear and bull markets may begin ahead of real-world economic slowdowns. For instance, the post-GFC bull market in the US started in March 2009, while the US economy would remain in recession until the middle of that year and remained weak for several years after.
A market correction is another term associated with falling security prices, though it has a different technical meaning to a bear market.
A correction occurs when an index or the price of a security drops more than 10% from its highs but less than 20%, which, of course, is the point at which the fall enters bear market territory. Corrections are much more common than bear markets and tend to be shorter lived. According to a CNBC report, the average bear market in the S&P 500 has lasted around 13 months, compared to four months for the average correction.