Why Is a Declining Stock Market Called a Bear Market?

A bear market describes a prolonged period where stock prices generally decline. This phenomenon is often characterized by a significant downturn across broad market indices, typically representing a drop of 20% or more from recent highs.

The Nature of a Bear Market

A bear market signifies a weakening economy and a loss of investor confidence. It is characterized by widespread pessimism and a sustained decline in asset prices. It also involves a shift in investor sentiment, leading to fear and large-scale selling of securities. During this period, trading activity may decrease, and economic indicators often show signs of contraction. This environment differs from a market correction, which is a shorter-term decline, usually less than 20%.

Origins of the Bear Term

The term “bear market” has several historical theories and metaphorical origins. One theory traces its roots to the 18th century, to “bear-skin jobbers” in London’s financial district. These jobbers would sell bear skins they had not yet acquired, speculating that they could purchase them at a lower price before delivery. This practice mirrored short-selling, where an investor sells borrowed securities hoping to buy them back cheaper later and profit from the price difference. The phrase “selling the bear’s skin before one has caught the bear” became a proverb, and “bearskin jobber” was shortened to “bear” to describe speculators who profited from falling prices.

Another explanation relates to the animal’s physical characteristics. A common metaphor suggests that a bear attacks by swiping its paws downward. This downward motion symbolically represents falling stock prices in the market. The bear’s tendency to hibernate or move slowly also contributes to the imagery, reflecting a sluggish or declining market environment.

The term gained wider usage around the time of the South Sea Bubble in 1720, a significant financial crash in England. Daniel Defoe, in 1726, used “bear-skin jobber” to describe those who were deceitful or speculative. Thomas Mortimer further solidified the term in his 1761 book, “Every Man His Own Broker,” describing “selling the bear” as short selling.

The Bull Market Counterpart

In contrast to a bear market, a “bull market” describes a period of rising stock prices and general optimism. The term “bull” is also rooted in animal metaphors, specifically how a bull attacks. A bull thrusts its horns upward when charging, symbolizing the upward trajectory of prices in a thriving market.

These two animals, the bear and the bull, are used in opposition to represent the contrasting trends in financial markets. The imagery of their attacking styles provides a vivid and easily understood metaphor for market direction. While the bear represents a retreat and decline, the bull embodies aggressive upward movement and growth, reflecting positive investor sentiment and economic expansion.