In the 1700s, if a skin trader had a hunch that the prices of certain animal skins were about to decline, he would accept payment for a skin he did not own, hoping he could buy it later at a lower price to deliver to his customer. Although the practice ran counter to the 18th century proverb warning to never “sell a bear’s skin before catching the bear,” this practice of betting on lower prices became known as “bearskinning.” When skin prices did indeed fall, it led to what was described as a “bearskinning market,” which was eventually shortened to just “bear market”.
These days, the accepted definition for a bear market is a price decline of 20%. Since 1928, this has happened 25 times, or roughly every four years. The most recent instance occurred during the COVID-19 pandemic with the S&P 500 entering a bear market on March 12, 2020. The market dropped by around 34% at its lowest point but eventually recovered within a few months, with the S&P 500 reaching new highs later that year.
While a 20% price decline is significant, it is not unusual or necessarily catastrophic. In fact, double-digit declines occur quite regularly –about every 19 months on average.
For instance, in just three days in early August, the Dow Jones Industrial Average plummeted more than 2,100 points. By August 5th, the Nasdaq Composite had fallen more than 12% from its July high, officially entering correction territory. The Wall Street Journal ran an article that day warning of rising unemployment, decelerating wage growth, continued inflation, sluggish consumer spending and full-blown bear markets emerging in some overseas markets. Another WSJ headline read, “What to Do With Your Money if You’re Worried About the Market.”
Contrast that with a Wall Street Journal article this past week, titled, “Americans Are Really, Really Bullish on Stocks.” The September 3 piece noted that “Americans have rarely been this giddy about the stock market” and highlighted how investors, inspired by an 18% increase in the U.S. market this year, are enthusiastically pouring money into stocks.
This sudden wave of optimism may seem counterintuitive. After all, the logic of the bearskinners still holds: it’s wiser to buy after prices have dropped, not after they’ve surged. But markets are shaped not just by logic but also by the emotions, hopes, and fears of the people who participate in them. And as the past two months have demonstrated, these emotions can shift rapidly. Logically, buying a stock is little different than any other purchase; buying after a price decline is generally more sensible than buying something following a significant increase. Even 18th century bearskinners knew that.
David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.