The Necessities for a Bear (and Bull)

Certain words and phrases are used so frequently in everyday conversations that we often don’t know the origins. Think about how often we utter things like, “it’s raining cats and dogs” without knowing why. Even the internet can’t agree (crazy, right?) on the genesis of that expression and many other idioms. With that being said, I’d like to turn our attention to perhaps the most frequently used (and misused!) terms in financial markets: bull and bear. Why do we use them? Where did they originate? What defines them?

As luck would have it, Jason Zweig at The Wall Street Journal recently penned a history of the terms. Rather than step on his toes, I’ll let him describe: “According to Anatoly Liberman, a linguist at the University of Minnesota, the use of ‘bull’ and ‘bear’ to refer to financial optimists and pessimists, respectively, originated in Britain in the early 18th century. ’Bull’ evoked the bellowing of an eager buyer. ‘Bear’ appears to have come from an early proverbial expression, ‘to sell the bear’s skin before one has caught the bear’—an apt metaphor for a short sale, in which a trader sells borrowed shares in hopes of buying them back at a lower price.” I’m always fascinated how language can evolve from perhaps an obscure reference to now a mainstay in financial vocabulary. Despite their popularity, there is quite a bit of confusion about how to define them.

A bear market is most commonly defined as a 20% drawdown from a previous high. The prerequisites for a bull market are a bit more nebulous. Many people quote the bottom of the market as the beginning of a bull. Personally, I feel like bull and bear markets are more determined by general sentiment than an arbitrary number up or down. For example, was the general mood of the market optimistic on March 9^th, 2009? The S&P 500 bottomed at an ominous 666.79 in intraday trading that day and began what many people say was the beginning of our current bull market. If you were to ask the average market participant of their general mood that day, chances are they would not say “bullish.” As a matter of fact, the American Association of Individual Investors routinely asks its members if they are bullish or bearish and reports these results. As shown in the chart below, the bearish sentiment at the “beginning of the bull market” was at an all-time high right as the market bottomed. Astute readers will recognize that bullish sentiment peaked most recently at the most inopportune time.

My other issue with the definition is the arbitrary nature of the thresholds. I am certainly not the first to raise these objections, but why 20% and not 19.95%? We humans love round numbers. Why closing prices rather than intraday prices? Using intraday prices, the indexes twice fell below the 20% threshold during the last 10+ years only to rally at the end of the day to finish just shy of that mark. Were those not moments of high pessimism?

I realize much of this blog is just semantics. Investors always have a laundry list of things to be worried about as they look to the future. Being scared out of investing because a bull market has become “long in the tooth” (bonus points for squeezing in another idiom) shouldn’t be one. Is there a chance that you are investing at the absolute short-term top? Yes. Even if that is the case, markets recover and make new highs all the time. For long-term money, your focus should always be 20-30 years ahead.