Bull and bear markets: definitions and what history shows

A bull market is a sustained rise in stock prices, and a bear market is a sustained fall. The terms are everywhere in financial news, but they are conventions rather than official categories. Knowing how they are usually defined, and what history shows, helps you put headlines in context.

Definitions

There is no official body that declares a bull or bear market. The most widely used rule of thumb is based on the size of the move:

• Bear market: a decline of 20% or more from a recent peak.
• Bull market: a rise of 20% or more from a recent low.

Analysts differ on details, such as whether to use closing prices or intraday prices, and which index to use. Because of this, two news sources can mark the start or end of a market on different days. The same words are also used loosely for sentiment, and for individual stocks, sectors and other assets, not only the whole market.

Decline from peak (%) = (Peak - Current) / Peak x 100
Gain from low (%)     = (Current - Low) / Low x 100

Selected US bear markets

The table shows approximate peak-to-trough declines in the S&P 500 price index, which excludes dividends. Figures are rounded, and the exact numbers depend on the dates and the data used.

Bull markets have been much longer. The one that began in March 2009 lasted roughly eleven years, until early 2020, which makes it one of the longest in US history. Over long periods US stock prices have trended upward despite repeated bear markets, but that is a description of the past, not a guarantee.

What drives them

Causes vary. Bull markets are typically associated with growing earnings, easier financial conditions and improving confidence. Bear markets are often associated with recessions, rapid interest-rate increases, financial stress or the bursting of high valuations, but not every bear market coincides with a recession. The 1987 crash, for example, was not followed by a US recession. The 2000 and 2007 declines each had a different trigger and unfolded very differently.

Example (illustrative numbers)

An index peaks at 4,000. It falls to 3,300, a decline of 17.5%. That is a correction by the usual convention, but not yet a bear market. It then falls to 3,150, a decline of 21.25%, which crosses the 20% line. Later it recovers to 3,780, a gain of 20% from the low of 3,150, which would conventionally mark a new bull market. Yet at 3,780 the index is still 5.5% below its peak. The labels describe moves of a set size, not whether you have recovered your losses.

How to read it: rules of thumb

• The 20% line is a convention, not a law. A 19% decline is not meaningfully different from a 21% one.
• Both labels are identified in hindsight. A decline only becomes a bear market after it has gone far enough, and nobody knows in advance which dips will stop short.
• Within a bear market, rallies of 10% or more are common. They are often called bear market rallies, and they can make declines feel over before they are.
• Bear markets are shorter than bull markets on average, though not always. The 2020 decline was very fast, and the 2000 to 2002 decline was slow.
• Individual stocks can fall much more than the index, and some never recover.

Common mistakes

• Trying to call the top or bottom. Few people do it consistently.
• Assuming the next bear market will resemble the last one. Depth, speed and causes differ.
• Selling after a large fall and missing the recovery. Emotional reactions to losses are well documented. See behavioral biases in investing.
• Confusing the market with your portfolio. A diversified index can recover while a particular company does not.
• Ignoring your own time horizon. Money needed soon is more vulnerable to a bear market than money that will not be touched for decades. See risk tolerance and time horizon.

For shallower declines and sudden drops, see corrections and crashes. For a measure of how nervous markets are, see volatility and the VIX.

Where to see it on StocksXray

The Market Compass page combines seven signals into a risk gauge (Risk-on, Neutral, Cautious or Defensive) and places growth and inflation conditions in a regime quadrant (see economic regimes). It is not a bull-or-bear call. Its hints describe what has tended to happen in similar conditions in the past and are not forecasts. You can also follow the benchmark on the S&P 500 index page.

Key takeaways

• A bear market is conventionally a fall of 20% or more from a peak, and a bull market a rise of 20% or more from a low.
• The labels are conventions that are usually obvious only in hindsight.
• Past US bear markets varied widely in speed, depth and cause, and bull markets have generally lasted much longer.
• Your time horizon and diversification matter more than predicting the label.