What is a bull market?
The phrase “bull market” can describe markets in any kind of securities, but typically refers to stock markets.
The main characteristic of a bull market is where price in a market trends upwards over an extended period of time — whether months or years.
This long-term price movement is known as the secular trend.
Positive trends are driven by high investor confidence in the security to deliver returns.
In the case of stock markets, it means investors believe that companies will generate profits and pay dividends.
Therefore, bull markets usually coincide with strong periods for their relevant economies, characterized by rising economic indicators such as gross domestic product (GDP) and employment figures.
Bull markets begin and end with bear markets.
A bear market is characterized by a 20% fall following a peak.
Therefore, it is only possible to identify the end of a bull market retrospectively.
Why is it called a bull or bear market?
It’s uncertain where these names originated.
Some commentators believe they derive from the way in which these specific animals confront opponents: bulls push their horns upwards, while bears swipe their paws downwards, reflecting the respective secular trends in each market.
Others believe bull refers to the New York Stock Exchange’s construction on the site of a 17th century Dutch cattle market.
The phrase “bear market” was thought of by etymologists in reference to a proverb warning against selling “the bear’s skin before one has caught the bear,” symbolising brokers selling borrowed stock whose value they expect to fall (for example, short selling).
Bulls, meanwhile, are thought to symbolise purchases expected to increase in value.
How can we tell if we’re in a bull market?
There is no official definition of a bull market.
Generally, though, a bull market is considered a period of time in which prices rally 20% or more following their near term trough.
Bull markets also feature high demand for a security (the share market, for example) relative to supply, as more investors look to purchase and hold assets in the expectation of profits.
Market commentary tends to be optimistic in tone, with investor confidence rising.
How can you tell if a bull market has ended?
Bull markets are said to end when prices fall 20% from their near term peak.
Investors and analysts therefore cannot know when a bull market will end until after the event.
This 20% fall signals the onset of a bear market.
These typically accompany recessions, falling investor confidence, reduced corporate profits and rising unemployment, which are also traits of a market crash.
There are many factors that can cause bull markets to end.
Five outlined by Kiplinger are:
Rising interest rates
For example, the Nasdaq Composite was hugely overvalued at the end of the dot-com bubble in 1999, which proceeded the crash in 2000.
Psychological stages that drive a bull market.
Fund manager- John Templeton said that “bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.”
Since bull markets begin with price increases from a trough, they immediately follow bear markets, when pessimism is highest.
Templeton believed “the time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
Templeton bought $100 worth of each of the cheapest stocks available to him at the outset of the Second World War, which delivered average returns of 400% over the next four years. During this phase, also known as accumulation, early adopters exploit low stock prices to acquire cheap assets.
Scepticism: As prices rise, scepticism and talk of false recovery or false breakouts are abound.
Following a bear market, many investors are wary of being stung.
As prices rally, indicators such as employment lag help to sustain sceptical investor sentiment while the early majority join the market.
Optimism: This scepticism eventually matures into optimism once the late majority are convinced of the bull run’s authenticity.
This can, however, take years.
The post-crisis bull run, from the end of the 2008 global financial crisis until the coronavirus pandemic, was the longest bull market in history but was shrouded in scepticism for most of its duration.
During the optimistic stage, positive market sentiment lifts prices by increasing demand for securities.
Investors are confident their investments will yield returns, so will pay (and demand) higher prices for them.
Euphoria: This emerges when investors are so overconfident in the ability of securities to generate returns that prices inflate disproportionately.
This over exuberant euphoria leads to a crowded trade where there are few buyers left, and in turn results in an eventual decline in prices where early investors take profits.
This is also referred to as an economic bubble.
This leads to pessimism, a rush for the exits and a restarting of the bull/bear cycle.