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, it is generally understood to refer to a market where share prices have risen by 20% or more from their bottom.
Conversely, a bear market refers to 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.
Market characteristics
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’re usually talking about the performance of market-wide indices such as the S&P/ASX 200 Index (ASX: XJO) or perhaps 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.
A bull market is usually characterised by high investor confidence and general optimism about market trends and the state of the broader economy. Bull markets generally coincide with periods of broader 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 are investing with the expectation that ASX stock prices will rise in the future.
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 investing world. Bull markets tend to last for years, sometimes even more than a decade.
Because bull markets are longer-lasting than bear markets, they are also less dramatic by comparison. An old Wall Street saying aptly describes this phenomenon: ‘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 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). 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 buy in a bull market and sell in a bear market. In reality, trading based on whether markets are deemed to be 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 cheap, 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 simply useful terms to describe the holistic movements of the stock market, but not as serious inputs into an investment decision.