Key takeaways
- Investor.gov generally defines a bull market as a rise of 20% or more in a broad market index over at least two months, and a bear market as a fall of 20% or more over at least two months.
- A correction is commonly defined as a fall of 10% or more from a recent high, short of the 20% that would make it a bear market.
- The labels are measured from peaks and troughs, which are only known afterwards, so they describe the past.
- Bear markets can contain rallies of 5% or more that later reverse, so a rise does not by itself mark the bottom.
- The labels are usually applied to broad indexes; individual stocks can move differently.
"Bull market" and "bear market" are basic investing vocabulary, and they turn up in headlines announcing that one has started or ended. They are useful shorthand with specific, if conventional, thresholds, and they come with a catch: they can only be applied after the fact.
The definitions
Investor.gov, the SEC's investor education site, gives the general thresholds:
- Bull market: a time when stock prices are rising and sentiment is optimistic. Generally, a rise of 20% or more in a broad market index over at least a two-month period.
- Bear market: a time when stock prices are declining and sentiment is pessimistic. Generally, a fall of 20% or more in a broad market index over at least a two-month period.
A correction sits in between: Wikipedia says it is commonly defined as a decline of at least 10% from a recent closing high, with a decline of 20% or more generally classified as a bear market instead.
| Move in a broad index | Common label |
|---|---|
| Down less than 10% from a recent high | Below the correction threshold |
| Down 10% to just under 20% | Correction |
| Down 20% or more | Bear market |
| Up 20% or more from a low | Bull market |
These are conventions, not laws. Wikipedia notes that corrections are generally measured from a closing high to a closing low, and that the same percentage decline may be read differently depending on the index or period measured. The "broad market index" might be one such as the S&P 500; what is a stock market index? explains how those indexes are built.
A worked example
Suppose an index peaks at 5,000.
- It falls to 4,400: down 12%. That is a correction.
- It keeps falling to 3,900: down 22% from the peak. That is now described as a bear market.
- It recovers to 4,500: up about 15% from the low, a rally but not yet 20%.
- It reaches 4,700: up about 20.5% from the 3,900 low. Wikipedia notes that bull markets are generally said to begin when stocks rise 20% from their low, so by that rule a new bull market has begun, even though the index is still below its old peak of 5,000.
A new bull market by the 20% rule can therefore begin while prices are still well below their previous high.
Why the labels are always applied in hindsight
Each definition is measured from a peak or a trough, and you only know a peak was the peak once prices have fallen far enough from it. So:
- A bear market is "declared" only after prices are already 20% down.
- The bottom is identified only after prices have risen from it.
- In real time, nobody knows whether a 10% fall will stop there or become something larger.
The labels describe what has happened. They do not tell you what happens next.
Rallies inside bear markets, dips inside bull markets
Wikipedia's article on market trends describes a bear market rally as a price increase of 5% or more before prices fall again, and gives examples in the Dow after the 1929 crash. It also describes secular trends, lasting 5 to 25 years and made up of shorter bull and bear phases. As a market enters bear territory, the same article notes, the Cboe Volatility Index tends to rise; volatility explains that measure, and in extreme sell-offs trading can pause under market circuit breakers.
Where the names come from
The terms are old. The usual account traces them to London's Exchange Alley in the early 18th century, where traders who sold shares they did not yet own, hoping to buy them back cheaper, were called "bear-skin jobbers", from the proverb about selling the bear's skin before catching the bear. The name shortened to "bears", and traders who bought shares on credit, hoping prices would rise, came to be called "bulls". The popular explanation that a bull strikes upward with its horns and a bear swipes downward with its claws is generally regarded as a folk etymology. Either way, the names stuck to the direction of the market rather than to any particular trader, and today they describe broad moves in prices, measured by the thresholds above.
What the labels miss
- Individual stocks. The thresholds above are usually applied to broad indexes. Wikipedia notes the terms can also describe specific sectors and securities, and a single stock's path need not match the index.
- Your situation. Whether a decline matters to you depends on your time horizon and how much you could afford to lose; see risk tolerance and time horizon.
- Timing. Because the turning points are only known afterwards, the labels are of little use for deciding when to buy or sell. One reason some people invest a fixed amount on a regular schedule is to avoid having to guess, an approach explained in dollar-cost averaging, with its own limits.
Learn to Trade Stocks Beginner lets you replay simulated price action through rises and falls with a virtual balance, which is a safe way to see how hard turning points are to spot in real time. It is one of our education apps; the investing basics hub has the related guides.
Good to know
Frequently asked questions
What is the difference between a bull and a bear market?
What is a market correction?
How do you know when a bear market has ended?
Why are they called bull and bear markets?
Sources
- Bull Market (glossary) (opens in a new tab)Investor.gov, U.S. Securities and Exchange Commission — accessed
- Bear Market (glossary) (opens in a new tab)Investor.gov, U.S. Securities and Exchange Commission — accessed
- Market correction (opens in a new tab)Wikipedia — accessed
- Market trend (opens in a new tab)Wikipedia — accessed
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