JARGON BUSTER: BULLS, BEARS, HAWKS, DOVES AND ANIMAL SPIRITS
Roy Davidson, 22 April 2020
Of all the jargon used in financial markets, and there is plenty, references to the animal kingdom seem to be especially abundant. In this jargon buster we explain some of the more common animal related terms, what they mean, and where they come from.
“Wow, the bulls are really in charge following those dovish comments!”
Bulls and Bears
Bullish investors are those who could be said to be more optimistic or hopeful about market conditions. Bulls want the market, or particular shares or commodities to go up. Conversely, bears are those investors who are more cautious or sceptical, and as a result expect the market or certain prices to fall.
When the overall market is strong and trending upwards, we are said to be in a bull market. The majority of investors are generally optimistic and hopeful, with prices rising in turn. On the other hand, when euphoria gives way to fear and pessimism and the market falls over a sustained period, a bear market takes hold.
For example, we could say that shares have been in a bull market over the past decade or so, with sharemarkets around the world (not to mention the property market) reaching record highs. Conversely, the COVID-19 outbreak plunged markets into a bear market, with key sharemarkets falling more than 20% from their peaks.
Why bulls and bears? Some say it is due to the way the two animals attack; bulls thrust their horns up while bears slash their claws down. However, this is dubious.
The more likely explanation, and one for which there is historical evidence, is that it harks back centuries to the bearskin trade and the fact that some middlemen would sell bearskins before they had acquired them. These traders would benefit from falling prices, and the term ‘bear’ stuck. The bull came later as an appropriate foil for the bear. By the early 18th century the terms were in common usage.
Come, fill the South Sea goblet full;
The gods shall of our stock take care;
Europa pleas’d accepts the Bull,
And Jove with joy puts off the Bear.
Alexander Pope – An inscription upon a punchbowl in the South Sea Year (c. 1720).
Hawks and doves
You may have heard this used in a foreign policy sense with someone in favour of military action said to be a war hawk and those opposed said to be a dove.
In markets, the terms hawk and dove are used in reference to the actions of central bankers in charge of setting interest rates and controlling inflation. That these terms have become so prevalent in the news demonstrates how the importance of central banks in the economy has grown in recent years.
A hawk generally favours tighter monetary policy, preferring to keep interest rates high to choke off the possibility of generating high levels of inflation or asset bubbles. This can often come at the expense of economic growth and employment.
A dove, on the other hand, is less concerned with inflation and prefers to keep rates low, thereby stimulating economic growth and employment. Dovish monetary policy actions are also typically positive for the sharemarket, not only due to creating more favourable economic conditions, but because lower rates increase valuations across the board.
Maybe the most famous hawk was Paul Volcker, who chaired the US Federal Reserve for eight years, beginning in 1979. Soon after entering office, US inflation stood at 14.8% prompting the Fed to aggressively increase rates. While this had severe ramifications for economic growth and unemployment in the short-term, within a few years inflation fell to below 3% - a much more manageable rate for businesses and consumers.
Following the global financial crisis, monetary policy turned very dovish. This is typified by the US Federal Reserve’s quantitative easing programme, first instigated in 2008, and the European Central Bank’s commitment to “do whatever it takes” to shore up markets and preserve the euro. Today, interest rates across the world remain at, or near, record lows.
Some other terms from the animal kingdom:
First coined by economist John Maynard Keynes in 1936, this saying actually refers to one of our basic instincts – the tendency to follow the herd. While not sticking your neck out too much was probably advantageous for our ancestors, in modern financial markets, these ‘animal spirits’ can create periods of irrational exuberance leading to bubbles.
Black swan event
An unpredictable event with severe consequences. In a word: coronavirus.
Best of Breed
Borrowed from dog shows, this term refers to the highest quality company in a particular industry.
A steady business that provides a company with a stream of reliable cash flows. Often this enables the company to invest in other areas.
Dead cat bounce
Somewhat barbarically, a dead cat bounce is a temporary recovery in a share price that is steadily trending down (or in a bear market) - because even a dead cat bounces when it hits the ground.
Dogs of the Dow
A ‘dog’ is a poor performing company. The Dogs of the Dow is an investing strategy of buying those stocks in the Dow Jones stock index with the highest dividend yields (which are therefore the cheapest). Variations of this approach include buying those stocks which have performed the worst in a given year in the hope that they will rebound over the next year.