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

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You might have come across the term 'bull market' during your ASX investing journey, or perhaps its ursine counterpart, the '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

As we all probably know from experience, the stock market can be incredibly volatile. Share prices will often rise and fall dramatically based on global events, changes in investor sentiment, or sometimes for no discernible reason!

When investors refer to a bull market (or sometimes a 'bullish market'), they're talking about a sustained rise in share prices. While there is no universal definition for a bull market, we generally understand it as a market where share prices have risen by 20% or more from their bottom.

Conversely, a bear market is a sustained fall in share prices, usually more than 20%. The stock market is always either bullish or bearish, which means the current bull market ends once stock prices fall more than 20% from their peak, and the next bear market begins.

Remember that stock prices can still fall in a bull market. For example, a stock market correction usually refers to a fall in prices of at least 10% from their peak. However, the bull market continues if prices recover before falling more than 20%.

When we say 'the market', we usually talk about the performance of market-wide indices such as the S&P/ASX 200 Index (ASX: XJO) or the Dow Jones Industrial Average Index (DJX: .DJI) in the United States. 

However, the terms 'bull' and 'bear' can also be used in other markets, such as commodities, bonds, real estate, or cryptocurrencies

Bullish characteristics

High investor confidence and general optimism about market trends and the state of the broader economy are the general characteristics of a bull market. Such markets typically coincide with periods of expansive economic growth, low interest rates, and often increasing inflation.

Investors themselves can be described as either 'bulls' or 'bears' depending on whether they have an optimistic or pessimistic outlook on the stock market. If an investor is 'bullish on ASX shares', for example, they expect that ASX stock prices will rise.

On the other hand, an investor with a 'bearish' outlook expects share prices to fall. 

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, while 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 investing world. Bull markets can last for years, sometimes even more than a decade.

Because bull markets are longer-lasting than bear markets, they also tend to be less dramatic by comparison. An old Wall Street saying describes this phenomenon aptly: 'The bull takes the stairs, and the bear takes the window'.

Other positive economic events often accompany a bull market, such as economic growth and falling unemployment. A disastrous event usually ends it. Some examples are the coronavirus pandemic, the global financial crisis, the 2001 September 11 attacks, and 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). Intersecting these bull markets was one of the shortest and most severe bear markets ever seen on the ASX. 

The ASX again entered bear market territory in 2022 as interest rate rises began to bite. Since then, the market has been relatively flat as investors adjust to the 'new normal' of higher interest rates. No one can ever be sure when the next bull market will start — but you can plan for it.  

How to invest in a bull market

Investors often tout the misconception that you should buy in a bull market and sell in a bear market. In reality, trading based on whether markets are bullish or bearish isn't always a sensible investment strategy.

The problem with attempting to 'time the market' is that the beginnings of bull and bear markets are usually only apparent in hindsight. Sure, everyone wants to buy low and sell high, but instead of getting too distracted by the vagaries of the capital markets, you should focus on the fundamentals of the stocks you want to trade.

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

As such, most investors (including us Fools) view the concepts of bull and bear markets as valuable terms to describe the holistic movements of the share market but not as fundamental inputs into an investment decision.

  • Additional reporting: Kate O'Brien

Frequently Asked Questions

A bull market is the financial world's version of a sunny day – everything looks bright, and share prices are climbing consistently. We characterise a bull market as a significant rise in stock prices, not just in one sector but across the board. They usually occur when the economy is performing robustly, corporate profits are substantial, and investor confidence is high. This positive sentiment encourages more people to invest, fuelling the upward trajectory. But remember, the stock market is a bit like the weather – ever-changing. While bull markets are part of the natural market cycle, just like weather patterns, they don't last forever. This means that while savvy investors will enjoy the sunshine during a bull market, they will also prepare for the inevitable rainy day.

In the share market, 'bull' and 'bear' represent contrasting market conditions. A bull market is akin to a sunny summer day – stock prices are increasing, investor confidence is high, and economic conditions are usually favourable. A bear market, on the other hand, is similar to a stormy winter night – share prices fall, and investor confidence declines, often reflecting a downturn in the broader economy. During a bull market, investors actively buy, driven by expectations of future profit and economic growth. By contrast, investors become more cautious during a bear market, often leading to a sell-off. Nonetheless, both bull and bear markets are integral parts of the financial market's cycle, each presenting unique challenges and opportunities.

Bull markets can be attractive to investors, as they are characterised by rising stock prices and investor confidence. The upward trend in a bull market indicates that investments made during this period will likely appreciate in value. For short-term investors, a bull market presents a chance to capitalise on momentum and growth in share prices. However, stocks tend to be pricier in a bull market due to high demand, and there's the risk of entering the market when it is nearing its peak, which could lead to losses if the market adjusts or reverses.

While the positive trend of a bull market can be promising, it's crucial to consider the potential for overvaluation – when stock prices exceed their actual worth. Long-term investors should focus on a stock's intrinsic value and potential for long-term growth rather than making decisions based on market momentum. Being mindful of market cycles is vital -- understanding that what goes up can also come down is essential for making informed investment choices. Ultimately, while a bull market offers growth potential, it demands prudent investment decisions backed by thorough research and a clear understanding of one's financial objectives and risk profile.

This article contains general educational content only and does not take into account your personal financial situation. Before investing, your individual circumstances should be considered, and you may need to seek independent financial advice.

To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a 'top share' is always defined by the largest market cap at the time of last update. On this page, neither the author nor The Motley Fool have chosen a 'top share' by personal opinion.

As always, remember that when investing, the value of your investment may rise or fall, and your capital is at risk.

The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.