Bullish vs Bearish: What’s The Difference? Finance History 101

Bullish vs Bearish
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The charging bull which symbolizes financial optimism sits in the financial district in New York City.

Bullish vs Bearish are common terms used in the investing lexicon. You may have heard the terms used while listening to CNBC or reading the Wall Street Journal.

But what exactly does being “bullish” and “bearish” mean and where did those terms come from?

Let’s take a look at the definition bullish vs bearish and the history of the two terms.

What Does It Mean To Be Bullish?

When someone says they are Bullish, they believe an individual stock, industry sector, or the stock market in general will go up in value.

When one refers to the stock market, they are most likely referring to the S&P 500, a weighted average of the 500 largest publicly traded companies by market capitalization.

You can be Bullish on a stock or the stock market for a number of reasons including, but not limited to:

  • Strong earnings of the individual company, industry, sector, or overall stock market
  • An excellent business strategy that will put the company in a competitive advantage
  • Advantageous economic data (low unemployment, inflation, increased Gross Domestic Product, increased retail sales, increased durable goods orders)
  • Introduction of new technology
  • Increased production capacity
  • Decreased production costs

Someone might say “I am Bullish on Apple because of the new device they are coming out this year.”

What Does It Mean To Be Bearish?

When someone says they are Bearish, they believe an individual stock, industry sector, or the stock market in general will go down in value.

The reasons for being bearish can include, but are not limited to:

  • Weak earnings of the individual company or overall stock market
  • A poor business strategy that will put the company in a competitive advantage
  • Unfavorable economic data (high unemployment, inflation, decreased Gross Domestic Product, decreased retail sales, reduced durable goods orders)
  • Decreased production capacity
  • Increased production costs

A person might say “I Bearish on the market because unmployment and inflation are abnormally high.”

Where Did The Term Bullish Come From?

The etymology of the term bullish is unclear. However, most people lend the meaning to the way a bull attacks.

  • The term Bullish comes from a bull’s method of attack. When a bull attacks, it moves its horns upward, analogous to the stock market going up in value.

Analysts often consider it a bull market if there is a 20% or more rise from the stock market’s most recent low.

The longest bull market in history lasted 11 years, began in March 2009, and ended in March 2020, when the S&P 500 rose nearly 460%.

Where Did The Term Bearish Come From?

Bullish vs Bearish
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The longest Bear Market in history lasted 5 years and ended in 1942, after the S&P 500 lost 50% of its value

There are two theories as to the genesis of the usage of the term Bearish.

  • Similar to a bull, the term bearish is derived from a bear’s method of attack. When a bear attacks, it paws down, analogous to the stock market moving downward, or losing value.
  • The second theory is that the term comes from a proverbial expression “selling the bear’s skin before one has caught the bear.” Meaning if everyone is selling the prices will go down in value.

Conversely, analysts consider it a bear market if there is a 20% or more decrease from the most recent stock market high.

The longest bear market in history lasted about 5 years and ended in March 1942, where the S&P 500 lost about 50% of its value.

In 2008, many investors were bearish on the housing market as the economy teetered on the brink of financial disaster.

Is It Better To Be Bullish or Bearish?

Most investors are bullish over the long term, meaning they want the stock market to go up in value.

There are sophisticated investors such as hedge funds and institutional investors that made fortunes by taking advantage of bear markets through short selling.

For example, hedge-funder John Paulson bet against the housing market during the 2008 crisis by shorting mortgage-backed securities.

Paulson’s strategy netted him $15 billion and made him a hedge fund superstar.

There are numerous strategies to take advantage of bull and bear markets. However, trying to time the market is often difficult for individual investors and is best left to professional investors.

How To Make Money In Each Type of Market

There is no 100% guaranteed way to make money in each type of market. However, there are some common strategies deployed depending on the environment.

Strategies deployed in a Bear Market

  • Shorting Stocks or Market Indexes
  • Selling Covered Call Options to generate income
  • Buying Put Options to hedge downside risk
  • Buying stocks that are on sale

Strategies deployed in a Bull Market

  • Selling Put Options for income generation
  • Buying Call Options to take advantage of increasing stock prices

The Bottom Line

Gaining a better understanding of the difference between bullish vs. bearish and familiarizing yourself with investing lexicon, in general, will allow you to digest financial news more quickly.

There have been bull markets and bear markets caused by different economic, social, and now medical-related factors throughout history.

The most recent Bear Market occured in March 2020 when the S&P 500 dropped about 35% as the COVID outbreak took hold and sent fear rippling through the stock market and world.

Those fears quickly resided and stock markets are now reaching records levels.

That said, as an individual investor, it’s best not to panic buy or sell. Individual investors should maintain a well-diverified portfolio so they can be prepared to weather all market conditions.

Adam
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