Bull and Bear Markets Explained: What the Labels Do and Do Not Tell You

A bull market is conventionally a rise of 20% or more from a low. A bear market is a fall of 20% or more from a high.

Both definitions are arbitrary, and both are only identifiable after the fact. Their real usefulness is not as thresholds but as shorthand for two genuinely different environments, in which the drivers, the dynamics and above all the behaviour of participants differ.

The origin of the terms

A bull attacks by thrusting its horns upward; a bear swipes downward. The imagery is from eighteenth-century London and has outlasted every other piece of terminology from the period.

Bull markets

Typical characteristics: rising prices over an extended period, expanding valuations, strengthening economic data, high risk appetite, low volatility, and a steady flow of new participants.

What drives them: earnings growth, falling or low interest rates, accommodative credit conditions, and improving confidence. The rise typically outlasts most predictions of its end.

The behavioural pattern: confidence gradually becomes indistinguishable from skill. Risk tolerance rises because recent experience has been benign, which is precisely when the observed risk is lowest and the actual risk highest. Late-stage bull markets characteristically feature stories about a new paradigm, and a rising share of participation from people who arrived recently.

Historically, equity bull markets have lasted considerably longer than bear markets and produced gains far exceeding subsequent losses, which is the central argument for remaining invested through cycles.

Bear markets

Typical characteristics: falling prices, contracting valuations, deteriorating data, elevated volatility, and pervasive pessimism.

What drives them: falling earnings expectations, rising interest rates, tightening credit, external shocks, or the unwinding of a valuation extreme.

The behavioural pattern: the mirror image. Risk aversion peaks after prices have already fallen, meaning the instinct to sell is strongest close to the point of maximum opportunity. Bear markets also produce violent rallies — sharp multi-day gains that feel like a bottom and are not. These occur repeatedly within extended declines and are among the most reliable ways to be drawn back in prematurely.

The arithmetic of recovery

This is the part that determines outcomes, and it is not intuitive.

Decline	Gain needed to recover
10%	11%
20%	25%
30%	43%
50%	100%
70%	233%
90%	900%

The asymmetry compounds. It is why limiting the depth of a drawdown matters more to long-run wealth than capturing every part of an advance, and why leverage is so dangerous in this context — it deepens the drawdown from which recovery must occur.

Why the labels are less useful than they appear

They are retrospective. The 20% threshold is only crossed after most of the move has happened. Nobody rings a bell.

They are arbitrary. A 19% fall and a 21% fall are near-identical experiences with different names.

They describe an index, not a market. Different sectors, regions and asset classes rotate independently. A bear market in growth equities can coincide with a bull market in energy.

They do not predict. Knowing that a bear market has been declared tells you what already happened, and the historical record shows the largest single-day gains cluster inside bear markets rather than outside them.

What actually distinguishes the phases

More informative than the price threshold:

• Breadth. How many components are participating. Narrow leadership — an index carried by a handful of names — has historically signalled fragility.
• Credit conditions. Corporate borrowing spreads typically widen before equity markets fall meaningfully.
• Volatility regime. Sustained shifts matter more than spikes.
• Earnings revisions. Whether analysts are raising or lowering forecasts.
• The yield curve and policy direction. Which sits underneath most of the above.

Behaviour, which is the real variable

The historical evidence on timing these transitions is consistent and unflattering.

Investor returns have persistently lagged the returns of the funds those investors held, because of when money was added and withdrawn — buying after gains, selling after losses. The gap is a measure of behaviour, not of markets.

Missing a small number of the strongest days materially reduces long-run returns, and those days cluster during periods of maximum pessimism, close to the days people are most inclined to sell.

The practical implication is uncomfortable: the intervention that feels most necessary during a bear market is usually the one that costs most.

What to actually do

Decide the allocation before it is tested. The time to determine how much volatility you can tolerate is when markets are calm.

Size so that a large fall is survivable. If a 40% drawdown in part of a portfolio would force a sale, the position was too large before it fell.

Rebalance mechanically. A scheduled rebalance sells strength and buys weakness without requiring a judgement call in the moment.

Separate horizons. Money required within a few years should not be exposed to a drawdown that takes years to recover.

Ignore the labels. Whether an index has crossed an arbitrary threshold changes nothing about your circumstances.

The bottom line

Bull and bear are convenient shorthand for two environments that differ in what drives them and in how people behave inside them. The 20% definitions are conventions, applied retrospectively, and they have no predictive content.

What matters is the recovery arithmetic and the behavioural record — and both point at the same conclusion, which is that limiting damage and holding a position you can actually maintain beats attempting to switch between the phases.

This article is educational and is not financial advice. Markets can fall as well as rise and past performance is not a guide to future results.