Investment fundamentals: Bulls, Bears, Corrections, and Crashes

Wall Street uses a number of monikers to describe various patterns in broad market indexes. Bull markets, bear markets, market corrections, and market crashes all refer to market movement trends that either excite or scare investors.

Bull Market (most optimistic)

• Defined as an increase in a broad market index of 20% or more in a two month period.
• Associated with a strengthening economy (e.g. strong Gross Domestic Product, low unemployment, rising corporate profits).
• The term “bullish” describes a person that is optimistic about their prospects and rising stock market prices.
• There’s no conclusive evidence of the term’s origin. One theory relates to the way bulls attack: by thrusting their horns upward, which is meant as a symbol of rising stock prices. Conversely, bears attack by swiping downwards (and thus, represents declining stocks prices.)

Correction (least severe)

• Defined as a decline in a broad market index of 10% or more from the most recent high.
• Have averaged about one per year in the U.S. and last about two to three months.
• Serve to keep stocks from becoming overpriced or inflated—correcting market exuberance that may otherwise result in stock prices rising faster than is justified by underlying company earnings.

Bear Market (second most severe)

• Defined as a sustained decline (of at least two months) in a broad market index of 20% or more from the most recent high.
• Have averaged about one every three years in the U.S. The Global Financial Crisis of 2007 was a bull market.
• Associated with a slowing economy (e.g. weak Gross Domestic Product, rising unemployment, declining productivity).
• The term “bearish” describes a person that is pessimistic about their prospects and declining stock market prices.
• In addition to the metaphor of bulls and bears methods of attack, the term “bear market” is also thought to stem from eighteenth-century bearskin sellers who sold products that they did not yet own at a speculative price. Their hope was that the market value of the product would decrease before they had to purchase the bearskin to fulfill their sales, and thus they would profit from the price difference.

Crash (most severe)

• Defined as a sudden decline (such as within a single day or week) in a broad market index of 50% or more from the most recent high
• Have occurred far less frequently than corrections or bear markets Typically followed by recession (defined as two or more consecutive quarters of economic output falling by at least 10%) or depression (loosely defined as an even steeper, more prolonged decline in economic output).

Important information

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only. There are risks involved with investing, including loss of principal. Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company. Neither SEI nor its subsidiaries is affiliated with your financial advisor.