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You may have heard that the S&P 500, the true benchmark for U.S. stocks, entered a bull market last week. Here’s what that means.
The terminology
Stocks are always in either a bull market — meaning prices are on the rise or are expected to rise — or the opposite, a bear market.
Bulls and bears aren’t just for stocks. Virtually all other financial markets, including bonds and commodities, are referred to as being in either a bull or a bear market.
Why bulls and bears?
So how did these fearsome beasts come to represent opposite sides of the market?
The origins are a bit murky. Google “bull” or “bear” and you’ll find competing theories. But one of the more often used explanations is that a bull on the attack swipes its horns upward, while a bear swats downward with its paws.
Ask the lexicographers at Merriam-Webster, however, and they will tell you it was the bear that arrived first, making its appearance in terminology around the time of the South Sea Bubble in the 18th century.
They noted a proverb advising that it wasn’t wise “to sell the bear’s skin before one has caught the bear.”
“By the 18th century, the term bearskin was being used in the phrase ‘to sell (or buy) the bearskin’ and in the name ‘bearskin jobber,’ referring to one selling the bearskin,” the dictionary site said, noting that “bearskin” was quickly shortened to “bear” and was applied to stock being sold by a speculator as well as the speculator selling the stock.
According to this explanation, the term “bull” came later to refer to a speculator buying a stock in anticipation of its rise — a term that was seen as a “fitting alter ego to the bear,” according to Merriam-Webster.
What causes bull and bear markets?
Bull markets, unsurprisingly, are typically associated with periods of economic expansion and growing corporate profits. Bear markets are associated with the opposite.
Bear markets often begin as fears around economic growth begin to mount, taking hold well before an economy enters recession. Indeed, the just-completed bear began in early 2022, even as the economy was still going strong.
Similarly, the bottom of a bear market can come even as negative economic headlines dominate, such as in March 2009, reflecting expectations the worst is over.
Why do people say stocks are now in a bull market?
The S&P 500 SPX closed June 8 at 4,293.93, marking a gain of a little over 20% from its Oct. 12, 2022 finish, which was the lowest close since the start of the bear market last year. Under the criteria used by Dow Jones Market Data and many other market watchers, this 20% rise from the recent low signals that the S&P 500 has entered a bull market.
Conversely, a 20% fall from the recent high signals the start of a bear market. That means the market is always in either a bull or bear market.
Also, the market doesn’t hop into and out of either a bull or bear each time it crosses the threshold again. In other words, the S&P 500 wouldn’t exit the bull market by merely moving back within less than 20% of its Oct. 12 finish. It would take a 20% fall from its closing high set after the move back into a bull market to change its status.
Does everyone agree that the S&P 500 is in a bull market?
Far from it. The threshold for declaring bulls and bears is admittedly arbitrary. Some market watchers insist that a bull market won’t be confirmed until the S&P 500 takes out its previous record closing high from Jan. 3, 2022. Others use far more complicated sets of criteria.
And there are bull-market doubters whose concerns have less to do with the criteria than the concentrated nature of the S&P 500’s rally. Gains for the index have been fueled to an extreme degree by gains for a handful of megacap, tech-related stocks, making many investors wary because the average stock has been left behind.
In One Chart: Why stock-market bulls must beware of ‘bogus bear-market bottoms’
While the S&P 500, which is weighted by market capitalization, was up more than 12% in the year to date through Friday, the equal-weighted measure of the S&P 500 had gained just 2.6%.
The Nasdaq Composite
COMP,
exited a bear market on May 8, while the Dow Jones Industrial Average
DJIA,
exited its bear on Nov. 30.
Mark Hulbert: What the S&P 500’s new bull market tells us about what’s to come
