Bulls and bears: Why are these animals used in finance?

Take a look at stock market news headlines on any average day and you’re likely to see analysts talking about two very aggressive animals: bulls and bears.

“Are we in a bear market?” Barron’s asks. Morgan Stanley analysts reckon so.

But Stockhead is observing a bull run in the ASX 200, while Benzinga reckons the S&P 500 is on the precipice of one.

So, what do these terms mean?


Bull and bear markets: Where do the terms come from?

Firstly, the terms can be pretty simply understood: bull markets are markets that are trending upwards, while bear markets are trending downwards.

Their heritage dates back to the early 1700s and the Exchange Alley in London, where early share trading took place in the coffee houses on the street.

As the story goes, some traders of the time engaged in what is known as naked short-selling – short-selling an asset without first borrowing the asset (short-selling occurs when an investor will profit if the share price falls).

Those who engaged in naked short-selling were called ‘bear-skin jobbers’, because they were – metaphorically at least – seen to be selling a bear’s skin before catching the bear. Thus, ‘bear’ was born.

Traders who bought shares in the proper manner were called ‘bulls’.


Bull and bear markets: What do they mean?

A bull market describes a financial market that is rising in conditions that are favourable.

A bear market, conversely, describes a financial market that is falling in conditions that are considered dour.

The terms can also refer to investors, given investors have so much influence on financial markets.

When it comes to stock markets, a bull run describes an upward trend in companies’ share prices, and one that is expected to continue sustainably for some time.

A bear market represents the opposite, although as a general rule, a market is not considered ‘bearish’ until it has fallen 20 per cent or more from sustained highs.

Like many financial concepts, bull and bear runs have plenty to do with psychology; bull runs inspire optimism while bear runs lead investors to sour on a market’s prospects. These attitudes can perpetuate and extend the cycles.


Need some real-life examples?

Data from LPL Financial Research shows the fluctuating movement of the S&P 500 index over the course of nearly 70 years.

Significant bear markets have been seen in the early 2000s, the mid 1970s and the early ‘80s; all times when the US was experiencing recessions.

Perhaps the most significant was during the 1973-75 recession, which affected most of the Western world and was driven by the 1973 oil crisis, when a number of large exporting countries in the Arab world placed an oil embargo on the US, the UK, Canada, Japan and a number of other countries.

It took the S&P 500 index an astonishing 69 months, or nearly six years, to recover its losses.

There are many examples of bull markets, of course, and many can be associated with the word ‘boom’ – the crypto boom, the mining boom and the dotcom boom are all examples of sustained bull markets.

In the US, the prime example of a bull market are the years between the end of the ‘stagflation’ era and the burst of what became a dotcom bubble in the early 2000s.

The US experienced a sustained period of stagflation, high inflation combined with high unemployment and stagnant demand, in the 1970s.

In the period following that stagflation, the Dow Jones Industrial Average saw annual returns of around 15 per cent and the value of the NASDAQ increased five-fold in as many years.

But you don’t have to go back far for more examples – the longest bull run in modern history lasted from the end of the global financial crisis to the COVID-19-induced worldwide economic downturn.


Where are we right now?

Financial markets have recovered strongly since they fell to catastrophic lows in March of 2020.

The rebound is largely thanks to widespread vaccine rollouts and the less frequent use of lockdowns as a protective measure against COVID-19.

As Yahoo Finance recently covered, however, investors are expecting a bear run in 2022.

Bank of America reported in its latest Global Fund Manager Survey that 60 per cent of respondents now anticipated global equity markets this year would experience a bear market – when securities prices fall 20 per cent or more.

The latest report marks a notable shift from the 30 per cent of survey participants that held that sentiment last month.

However, the bank has warned that perceptions are changing all the time.

“Investors are too focused on headlines,” it said in a recent note, adding the only certainty for now is that the 4,200 area is a big zone of interest for the S&P 500.

“Bullish and bearish convictions are shifting daily, sometimes hourly.”


Article from: au.finance.yahoo.com