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 it is important to furthering your investing education.
So, what do we mean by bull market and what do bovines have to do with investing?
The meaning of a bull market
When investors refer to a bull market, they are referring to a market that is rising and characterised by investor optimism, confidence and sometimes exuberance. Extending this, if an investor is ‘bullish on ASX shares’ for example, it means they are investing with the expectation that ASX shares will rise into the future.
There is no universal definition of a bull market. However, a common definition is a market where share prices rise 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 an investor refers to a bull market, they are usually referring to the performance of a market-wide index such as the S&P/ASX 200 Index (ASX: XJO). However, it can also be used to describe other types of markets, such as those for gold, bonds or property. Likewise, an individual share can be described as being in a bull market of its own, or its investors as ‘bullish’.
There are several stories of how the terms ‘bull’ and ‘bear’ came into use, but a common suggestion is that they are derived from the attacking style of the animal 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 “the bull takes the stairs and the bear takes the window”, which describes this phenomenon.
A bull market is often accompanied by other positive economic events, like a growing economy and falling unemployment. In contrast, it is often ended by disastrous events. The coronavirus pandemic, the global financial crisis, the September 11 attacks in 2001, or a recession are some examples.
The ASX 200 experienced 2 bull markets in 2020. The first was a continuation of the bull market ASX shares were in for a number of years, which ended in early March with the onset of the coronavirus pandemic. The second began in mid-April (when the ASX 200 recovery hit 20% off of its market 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 only obvious in hindsight and almost impossible to pick in the moment.
So when you decide you want to invest in a company, it might be a good idea to do so on the company’s fundamentals, rather than on the animalistic stance of the broader market. A cheap share of a quality business is a cheap share, regardless if it’s within a bull market or a bear market. And if your chosen business is a high-quality operator, its share price should be able to weather a bear market well 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.