What is a bull market?

A deep dive into everything you need to know about a bull market and why it’s a term for every investor to get their head around.

Bull market symbolised by golden bull figurine and gold share price arrows on a blue background
Image source: Getty Images

You might have come across the term ‘bull market’ in the course of your ASX investing career, or perhaps its ursine counterpart ‘bear market’.

It is one of the most common terms you will hear from market commentators, so understanding its meaning is important to furthering your investing education.

So, what do we mean by a bull market, and what do bovines have to do with investing?

The meaning of a bull market

When people refer to a bull market, they’re talking about a rising market. It is characterised by investor optimism, confidence, and sometimes exuberance. 

Extending this, if an investor is ‘bullish on ASX shares’, they are investing with the expectation that ASX shares will rise in the future. Likewise, an individual share can be described as being in a bull market of its own or its investors as ‘bullish’.

There is no universal definition of a bull market. However, a standard definition is a market where share prices have risen by 20% or more, usually after a drop of 20% or more. If a bull market ends, it will become a bear market until the market rises more than 20% from its bottom. As such, a bull market is said to end after a drop of 20% or more.

When we say ‘the market’, we’re usually talking about the performance of a market-wide index such as the S&P/ASX 200 Index (ASX: XJO). However, we can also use the term in reference to other types of markets, such as gold, bonds, or property. 

There are several stories of how the terms ‘bull’ and ‘bear’ came into use, but it is commonly believed they are derived from the attacking styles of the animals in question: A bull gores upwards with its horns, and a bear swipes downwards with its claws.

An example of a bull market

It’s worth noting that historically, bull markets have been the norm in the world of investing. Bull markets tend to last years at a time, sometimes even more than a decade. They tend to be less dramatic than a bear market but longer-lasting in compensation. There’s an old Wall Street saying that aptly describes this phenomenon: “The bull takes the stairs, and the bear takes the window”.

Other positive economic events often accompany a bull market, like a growing economy and falling unemployment. A disastrous event often ends it. Some examples are the coronavirus pandemic, the global financial crisis, the September 11 attacks in 2001, or a recession.

The ASX 200 experienced two bull markets in 2020. The first was a continuation of the bull market that ASX shares had been in for several years. That ended in early March with the onset of the coronavirus pandemic.

The second bull market began in mid-April (when the ASX 200 had recovered by 20% from its bottom) and continues to this day. Intersecting these bull markets was one of the shortest and most severe bear markets ever seen on the ASX. 

How to invest in a bull market

Investors often tout the misconception that you should invest during a bull market and sell in a bear market. In reality, investing just because markets are deemed to be bullish or bearish isn’t a sensible strategy.

Investing at the beginning of a bull market is usually a great idea, just as investing at the end of one is a bad idea. The problem is that these events are apparent only in hindsight and almost impossible to pick in the moment.

So, when you decide you want to invest in a company, do so based on the company’s fundamentals, not the animalistic stance of the broader market. 

A cheap share in a quality business is a cheap share regardless of whether it’s a bull or bear market. If your chosen business is a high-quality operator, its share price should be able to withstand a bear market and come out ready for the next bull market.

As such, most investors (including us Fools) view the concept of a bull market as simply a useful term in describing the holistic movements of the broader market and not as a serious input into an investment decision.

Updated 21 April 2022. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.