You’ve likely heard the terms bull market and bear market bandied about in newspapers and on TV in relationship to the stock market, and wondered to yourself, what do they actually mean?
Here, we’ve broken down bull markets versus bear markets so you can sound smart the next time they come up in conversation.
What’s a bull market?
In the simplest terms, a bull market is a period of rising stock prices. Traditionally it’s defined as a 20% or more gain for the Standard & Poor’s 500 stock index from a prior low. It’s also more loosely defined as simply a consistent period of rising stock prices.
It’s then defined as ending when the index suffers a 20% or more decline.
Why is the S&P 500 the barometer? Because it holds 500 of the US’s largest publicly traded stocks, which is considered a good overview of the market as a whole.
What’s a bear market?
Now, if a bull market means that times are good, a bear market means that times aren’t so good. It’s defined as a period when the S&P 500 suffers a 20% drop from a previous high, and stays that way for two-months or more.
Usually a bear market erases the gains from a prior bull market, and the losses can be pretty severe. Consider this: the average loss during a bear market since the Great Depression has been nearly 40%.
The last two bear markets, the 2008 recession, and the 2000-20002 downturn wiped out half of the market’s value.
There’s a silver lining here: bear markets have typically just lasted a little over a year, and looking back, the stock market has always recovered.
Another key point to keep in mind: Both bull and bear markets are considered “inevitable” by economists. In other words, it’s impossible to think that we are going to avoid a bear market forever, something to keep in mind as you consider what to invest in.
Feature Illustration: Laura Caseley For The Money Manual