Bear versus Bull markets

11 February 2016
With the news that shares have plummeted to a new 2 and a half year low, the ASX officially fell into a bear market in February.

But what is a bear market? And what is a bull market? Hopefully this article will answer the questions you might have.

What is a bull market?

Apparently, the term ‘bull market’ originates from the way that bulls attack their victims by driving their horns up into the air. And there’s also the fact that bulls, on the attack, charge straight ahead at pace.

A market is referred to as a ‘bull’ market when the share market is showing confidence. It is essentially a market in which share prices continue to rise, encouraging buying. After a sustained period of increasing share prices, investors gain faith that the uptrend will continue in the long-term. In a typical bull-market, the country’s economy is strong and unemployment is low.

A market may be called a bull market after a number of ‘bullish’ days in succession, but the technical criteria for a bull market is a rise in the value of the market by 20%. The last recorded bull market in the ASX was between June 2013 to April 2015, where securities rose by 28.5%.

What is a bear market?

The term ‘bear market’ apparently originates from the way that bears swipe their paws down while attacking in the wild.

‘Bear’ markets are the opposite of bull markets, and while there’s no hard and fast rule, the generally-accepted definition is that they occur when the markets fall by more than 20%. In bear markets, the prices of securities are falling, and widespread pessimism among investors caused by the falling prices leads to self-sustaining negative sentiment.

Investors continue to anticipate losses in a bear market, and continue to sell their shares. Many people see bear markets as an opportunity to make money due to the low share prices, but this requires finding a suitable entry point. Locating an entry point in bear markets can be hard as timing the bottom can be difficult to do.

Amidst fears of a looming global recession, the S&P/ASX 200 has fallen roughly 1200 points from a high of 5997 in April last year to 4775 points on the 10th of February. This represents a 20% decline, and meets the criteria for a bear market.

What are some of the biggest crashes in Australian stock market history?

  • 1929 Share market crash

More commonly known as the great depression, 1929 through to the mid-1930s was a time of extreme economic hardship for the people of Australia. Unemployment was already at 10% prior to the collapse of Wall Street, and the crash caused a severe depression for the whole industrialised world.

Unemployment soon doubled to 21% in 1930, and soon doubled to an incredible 32% in 1932. While the cause of the great depression in America is still debated by economists, it was more straight-forward for Australia. Australia’s monetary policy relied heavily on borrowing from other countries for investment.

  • 1987 Share market crash

Also known as Black Monday (Black Tuesday in Australia), the 19th of October 1987 saw stock markets around the world crash unexpectedly, shedding huge amounts of money in a short space of time. Markets in Australia fell by over 40%, and a full recovery took more than 5 years.

  • Asian Financial Crisis

Also called the Asian Contagion, the Asian Financial Crisis was a series of currency devaluations that spread throughout Asian markets in 1997. These currency declines caused reduced import revenues, government upheavals and stock market declines.

The AFC had no long-term impact on Australian shares. There was an almost 1,500 point drop in a few days following the crisis, but share prices returned to normal within 76 days.

  • 9/11 Terrorist attacks

After the horrific terrorist attacks in 2001 on the World Trade Centre, The New York Stock Exchange did not open for trading. The NYSE anticipated complete market chaos and panic selling following the attacks, and remained closed until the 17th of September, the longest shutdown since the Great Depression.

Once it re-opened, the US market fell by 7.1%, a record decline for a single day. The airline and insurance sectors suffered more than others. However, the U.S market regained its pre-9/11 prices after slightly more than a month following the attacks. The 9/11 attacks did not represent any long-term losses for Australia.

  • Global Financial Crisis

The GFC is considered to be the worst financial crisis since the great depression. Housing markets suffered, large financial institutions either collapsed or were bailed out by national governments, and stock markets dropped worldwide.

In 2008, the S&P/ASX 200 reached a low point of 3,120 points, but Australia performed well during the crisis compared to other countries. The Australian economy recorded better growth outcomes than most other developed countires and our banks have remained profitable. However, the current share value of 4720 is a far cry from the pre-GFC high of 6800, and this point has not been reached since.

Share this article