[Beginner's Guide] The 'Bear Market Rally' Is Over... How to Distinguish Between Bear Market and Bull Market?

[Image source=Yonhap News]

[Asia Economy Reporter Kwon Jae-hee] Our stock market, which had been on a downward trend earlier this year, showed an upward trend in August. If you read stock market articles, you have probably come across the term 'bear market rally' quite often. What exactly are the bear market and bull market frequently mentioned in the stock market, and how are they distinguished?

Bear Market vs Bull Market

In the stock market, a bull signifies a rise. A Bull Market refers to a prolonged period of rising prices. Conversely, a bear signifies a decline. A Bear Market is a term that denotes a prolonged period of falling prices. So, what is a bear market rally? As you might expect, it is a compound term combining 'bear market,' meaning a bearish market, and 'rally,' meaning an upward trend, referring to a temporary rebound in stock prices during a bearish market.

Then why are these names used? You might wonder what bulls and bears have to do with the stock market. There are various opinions on this, but a popular theory is that it originates from the attacking motions of bulls and bears. Bulls attack by thrusting their horns upward from below, which is thought to symbolize rising stock prices, while bears attack by swiping their paws downward, symbolizing falling stock prices. This explanation has gained credibility.

▲Major U.S. banks are concerned about losses due to energy company bankruptcies. The photo shows Wall Street, where major bank headquarters are located. (AP = Yonhap News)

What are the characteristics of bear markets and bull markets?

The stock market generally experiences more bull markets. Stock prices tend to follow the flow of economic conditions. If you look at stock charts over a period of more than 10 years, you will see an upward trend.

Let's take the U.S. stock market as a representative example. Since the 2008 financial crisis, the U.S. stock market has experienced a bull market from 2009 to 2020, except for one or two crises. Bull markets are characterized by gradual speed and long duration.

However, even in bull markets led by bulls, bearish phases sometimes appear. 2011 is a representative example. After the financial crisis, the global stock market, which had been on a bullish trend, experienced a shock in August 2011 due to the downgrade of the U.S. credit rating. The Nasdaq index plunged nearly 20% in a short period, resulting in a bear market lasting about five months. At the end of February 2020, when the COVID-19 pandemic occurred, the Nasdaq index plummeted from a high of 9,838 points to 6,631 points, a drop of as much as 32%.

[Image source=Yonhap News]

What is even more surprising is that this 32% crash happened within just one month. While it takes at least five months to rise more than 30%, bear markets are short and the decline is steep. This is a characteristic of bear markets?they fall very sharply in a short period.

Although the stock market tends to rise in the long term, it is not easy for investors to overcome the fear when a bear market hits with a sharp drop in a short period. It also takes a considerable amount of time to recover losses. This is still true today. After rising over the past month, volatility has increased again. Since bear markets can occur at any time, investors should closely monitor the market.

Editor's Note[Beginner's Guide to Stocks] is a smart investment guide for 'Joorini' (stock + beginner). We will kindly and easily explain unfamiliar stock stories to beginners.