Education

What is a Bull market?

06 Jul 2021 | by: Anna Farley

What is a Bull market?

A Bull market is a sustained period of rising prices, lasting months or years.

Although the term is usually used to describe the stock market as a whole, you can also have a bull market in currencies, real estate, commodities, or anything else that is tradeable.

One definition of a Bull market is a period where prices are up 20%, following a 20% decline. The Bull market ends when prices drop 20% again.

Bull markets tend to happen during a strong economy, with gross domestic product (“GDP”) rising and unemployment falling.

At these times, profits tend to be on the rise, and confidence is high. Likewise, demand is also high, as prices are expected to go up and market commentary tends to be positive.

Investors are more likely to invest in the stock market during a Bull run rather than investing in “safe haven” assets like gold and silver.

The opposite of a Bull market is a Bear market, a sharp drop in prices amid a lack of confidence.


There are two common explanations for the origins of the term ‘Bull Market’. One comes from the way bulls attack, thrusting their horns into the air. Another is that it comes from bull-and-bear fights, which used to be a popular blood sport.


How a Bull market works

All markets have optimistic Bullish investors and pessimistic Bearish investors. However, given that stock markets usually rise in the long run, a majority of investors are Bullish.

Bull markets often have other knock-on effects, too.

For example, initial public offerings (“IPOs”) tend to be much more common. This is when companies “go public” and list shares on a stock exchange.

Companies will seek the highest valuation possible at the time of listing, and typically raise funds from the market during the IPO itself. For this reason, they will often wait until a Bull market, when potential investors have more of an appetite.

Other consequences include the likelihood of “asset bubbles”. This arises when investors become too confident, and the price of an asset rapidly overtakes its underlying value.

As much as Bull markets are about rising GDPs, low unemployment, and other measurable skills, they are also about psychology.

Bottom line is, optimism leads to even more optimism.

When prices go up, the temptation to buy rises. As more people buy, demand increases while supply decreases, so prices rise even more. This attracts more buyers and the cycle repeats.

Broadly speaking, Bull markets tend to persist until investors stop believing that prices will keep going up.

This change in attitude can be triggered by economic recession or other factors, like a worldwide pandemic or the bursting of a bubble.

A favoured strategy is to buy assets and keep hold of them with the plan to sell later. This strategy is more popular in a Bull market, as investors are more confident the price will rise and they will be able to sell at a higher price.

Types of Bull markets

Bull markets come in four main types, based on how long they last and asset class.

Secular

Secular Bull markets are defined by how long they last, usually between five and twenty-five years.

The ‘Roaring 90s’, for example, lasted ten years from 1990 to 2000, driven by the end of the Cold War and the rise of internet stocks. In the ten-year period, the S&P 500 index went up by more than 400% before the “dot com bubble” finally burst.

During a secular bull market there are corrections where prices fall at least 10%, and there can even bear market periods.

However, the upward trend persists overall in spite of these “blips”.

Stock

Stock Bull markets are common when the economy is doing well.

Usually, major indices like the NASDAQ, Dow Jones Industrial Average, and S&P 500 all rise at once.

Higher profit, top-line revenue growth, and rising price to earnings ratios can all create a stock Bull market.

As always, sentiment remains a massive factor.

Bonds

Bull markets are also very common in the world of fixed income. Bonds are issued by companies and governments in order to raise funds, with an agreement to repay the sum lent along with an agreed rate of interest—or “coupon”.

US treasury bonds were in a Bull market all the way from 1981 to March 2021, ending with the introduction of the American Rescue Plan in the wake of the Covid-19 pandemic.

Gold

Gold Bull markets differ from others. Gold tends to perform best during times of crisis. This is because gold is considered to be a ‘safe haven’, meaning it is expected to keep or even increase its value when the market is in trouble. Investors often flock to gold when the stock market is struggling.

For example, gold climbed from around 1,520 per ounce at the end of 2019 to more than $2,000 per ounce in August 2020 in response to anxiety around the Covid-19 pandemic.

Advantages of Bull markets

As a time of high spirits and rising prices, Bull markets are typically excellent for investors.

Lower risk

Risk is lower in a Bull market. When the market is trending upwards with plenty of buyers thanks to sentiment, investments are less likely to lose value as a result of their fundamentals. This can make for a safer, more secure environment. That being said, of course, no market is risk free.

Selling high

For investors, getting a good price when selling is much more likely in a Bull market since demand exceeds supply. You can expect to sell assets at higher prices during a Bull run.

Rising prices are particularly beneficial for those who bought before the Bull market began, or even in a Bear market, when prices were lower.

Greater chance of success

The odds that any given asset will gain value rise sharply in a Bull market. As the saying goes, “a rising tide lifts all boats”.

Investors can expect to generally see assets perform at their best, and perhaps unexpectedly well, during a Bull run.

Disadvantages of Bull markets

While a Bull market can bring many advantages, especially for those looking for steady long-term growth, it isn’t all sunshine and roses.

Bubbles

When investors are convinced that prices will keep on rising, they may lose sight of a stock’s underlying value. In fact, they might start paying far too much.

Over time, this excessive optimism can lead to a bubble, a situation where prices climb higher and higher in a short space of time. Eventually, more and more people will become concerned about the disparity between the market value of an asset and it’s true, underlying book value, and the bubble can pop.

When this happens, it can lead to catastrophe and particularly tough Bear markets.

Did you know?


The 2007 financial crisis resulted from a bubble in the housing market. Banks sold mortgage-backed securities – groups of mortgages all bundled together. As more people defaulted on mortgages, the bubble burst, causing the worst economic disaster since 1929’s Great Depression.


High prices

While the ability to sell at a higher price is obviously a plus, the downside is that buying is also expensive. When everyone wants to get into a market, it’s tough to find a bargain.

In a Bull market, investing becomes less affordable and less accessible. Additionally, in the event of a bubble, it can be hard to keep sight of an investment’s real value and avoid overpaying.

A risk of reversal

Lurking in the back of any investor’s mind is the knowledge that, at some point, the Bull market will end. A secular Bull run may go on for decades, but it cannot go on forever.

Not only that, but some believe a coming Bear market is impossible to predict. Some factors in Bear markets include high unemployment and economic trouble, but others are unknowable.

The worst situation is to buy at the height of the Bull market and sell in the Bear market, paying the highest price and selling at the lowest.

What’s the Value?

  • Buy early: the best course of action is to buy when prices are lower, whether at the start of the Bull market or before it begins.
  • Be prepared: think long-term and have a Bull market strategy in place. Whether that approach will involve trying to time the market, or implementing a buy-and-hold, it is better to have a plan.

Valuethemarkets.com, Digitonic Ltd (and our owners, directors, officers, managers, employees, affiliates, agents and assigns) are not responsible for the content or accuracy of this article. The information included in this article is based solely on information provided by the company or companies mentioned above.

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

  • Anna Farley does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.
  • Anna Farley has not been paid to produce this piece by the company or companies mentioned above.

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