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Bullish vs. Bearish

Over time, the major U.S. equity indexes go up and down based on internal and external factors. Performance like that excites investors, but typically in opposite ways. Constant gains lead some investors to expect more of the same. Others worry the good times are surely about to end. The former sentiment is sometimes called “bearish,” while the latter is sometimes referred to as “bullish.” But whether your sentiment is bearish or bullish, one way to ensure you make rational investment decisions is to work with a financial advisor.

What Does It Mean to Be Bullish?

A bullish investor, also known as a bull, believes that the price of one or more securities will rise. This can apply at any scale of the market. Sometimes a bullish investor believes that the market as a whole is due to go up, foreseeing general gains. In other cases an investor might anticipate gains in a specific industry, stock, bond, commodity or collectible. If an investor is, say, bullish about ABC Corp., this means that he or she thinks that specific company’s shares will climb.

A bull market conveys a related meaning. It exists when prices, typically those of equities, are generally on the rise. While not every stock will necessarily increase, the market’s main equity indexes will. For example, during a bull market the Dow Jones Industrial Average and the S&P 500 can be expected to climb, even as some individual equities and sectors may not. Unlike a bear market, there is no universally accepted percentage gauge for how much a market has to rise before it qualifies as a bull market. The longest bull market in American history for stocks lasted for 4,494 days and ran from December 1987 to March 2000.

It might be said that the prevailing sentiment of participants in a bull market is greed or fear of missing out.

Where the Term Bullish Comes From

The term bull originally referred to speculative purchases rather than general optimism about prices and trend lines. When the term first came into use it referred to when someone grabbed a stock hoping it would jump up. Later, as years went on, the term evolved to refer to the individual making that investment. It then eventually transferred to the general belief that prices will rise.

Etymologists disagree on the exact origin of this term, however, it most likely has its origins as a foil to the term bear. While other theories circulate, this is the most generally accepted source of the phrase bull market. Perhaps the most widely reported alternative source for the term comes from how the bull as an animal attacks, by sweeping its horns upward in the same direction that optimist investors expect the market to go.

By contrast, under this theory, a bear market refers to how a bear will swipe downward with its paw. However, while literature contains numerous positive references to bulls throughout Western canon, etymologists have found little sound evidence for this specific theory in any historical record.

What Does It Mean to Be Bearish?

Bullish vs. Bearish

A bearish investor, also known as a bear, is one who believes prices will go down. As with a bullish investor, investors can be bearish about either the market as a whole or individual stocks or specific sectors. Someone who believes ABC Corp.’s stock will soon go down is said to be bearish on that company. An investor who foresees a market-wide dip in stocks, bonds, commodities, currencies or alternative investments like collectibles, is said to be bearish because he or she anticipates a sustained and significant downturn.

A bear market is one in which the prices of securities in a key market index (like the S&P 500) have been falling for a period of time by at least 20%. This isn’t a short-term dip like during a correction when there are price declines of 10% to 20%. A bear market is a trend that leaves investors feeling pessimistic about the future outlook of financial markets. A secular bear market is one that lasts for years. The longest U.S. bear market was 61 months, from March 10, 1937, to April 28, 1942. The most severe bear market chopped 86% from the market’s value; it extended from Sept. 3, 1929 to July 8, 1932.

It might be said that the prevailing sentiment of investors who expect a bear market is fear that a coming downturn will wipe out wealth.

Where the Term Bearish Comes From

The term bear market most likely came from both parable and practice. It generally relates to the trade of bear skins during the 18th century. During this era fur traders would, on occasion, sell the skin of a bear which they had not caught yet. They did this as an early form of short selling, trading in a commodity they did not own in the hopes that the market price for that commodity would dip. When the time came to deliver on the bearskin the trader would, theoretically, go out and buy one for less than the original sale price and make a profit off the transaction.

While this worked often enough to keep the practice going, it usually failed. This led to popular expressions of the time. These include “don’t sell the bear’s skin before catching the bear,” “selling the bearskin” and “bearskin jobber.” All of these basically referred to a warning about speculation and making promises you can’t keep, while a bearskin jobber basically was a way of calling someone a cheat and a liar. Today’s equivalent would be on the order of “don’t count your chickens before they hatch” and “snake oil salesman.”

But the expressions took on a more specific meaning among investors and stock traders, who understood the practice of speculating on an anticipated downturn. Among investors the term “bearskin trader” and eventually just “bear trader” came to refer to someone who traded stocks the same way disreputable fur traders dealt in pelts. A “bear” sold a stock he didn’t yet own, in the same way that trappers once sold the pelt of a bear they hadn’t caught, then bought the stock back in the hopes of doing so at a lower price and pocketing the difference – in effect a short sale.

Eventually the term bear expanded. Instead of referring specifically to short sale traders investors began referring to anyone who expected price dips as bearish, and declining prices as a bear market.

How to Persevere Through Both Bullish and Bearish Markets

Regardless of the current market we’re in, the standards of strong portfolios remain constant. The first thing you should have in order when it comes to investing is your ultimate financial goals. For most Americans, this principally includes retirement, along with vacations, buying a home and more. By defining your goals, you can make investment decisions based on them.

Once you know your goals and their timeline, you can build your portfolio’s asset allocation. This involves choosing the selection of investments within your portfolio and what percentages they’ll hold. For instance, someone nearing retirement may want to steer clear of individual stocks since they can be quite volatile. Angling towards investments like ETFs and bonds might instead be in order.

On the other hand, if you’re still far from retiring, you might want to take a chance on individual stocks. Their volatility and high-risk nature makes their return potential also much stronger. Since it’ll be a while until you retire, you can risk a bit for those earnings.

As your portfolio ages, you shouldn’t just leave it completely alone. Instead, you’ll want to rebalance your investments. This entails bringing your portfolio’s complexing back to your intended asset allocation. The necessity from this is derived from returns affecting your portfolio over time.

In the end, there is no way to ensure gains in the investment market. All you can do is maintain strong investment tendencies and make prudent decisions. In addition, try to avoid trading on emotion, as that can lead you down a dangerous path.

Bottom Line

Bullish vs. Bearish

A bullish investor, also known as a bull, believes that the price of one or more securities will rise. A bearish investor is one who believes prices will go down and eradicate a significant amount of wealth. In a sense, both types of investors react on fear: the bullish investor is driven by fear of missing out; the bearish investor is driven by fear of losing wealth. The fact that these terms are common reflects what a prominent role investors’ sentiments or moods play in buy-and-sell decisions.

Investing Tips

  • Consider talking with a financial advisor who can help you understand if an investment decision or strategy is based on emotions or something more objective. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • One way to handle your portfolio during either a bull or bear market is with a free investment calculator. Such a tool can help limit the role of emotion in your investment decisions.

Photo credit: ©iStock.com/peterschreiber.media, ©iStock.com/DNY59, ©iStock.com/Laurence Dutton

Eric Reed Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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