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- What is Bull Market
What is Bull Market
Bull market is the general term for prolonged market movements that are characterized by significant increase in the price of the asset. This bull market periods can last from weeks to months and years. Both separate assets as well as broad asset classes can experience periods that can be called bull market. Bull market in stocks is the widest known type of bull market. Bull markets in bonds and commodities are some of other examples of broad bull markets.
Earning profits by trading in volatile markets is not an easy proposition. At the same time, it is relatively straightforward how to make profits in a bullish market: when the overall price trend in a market is upward profits can be made by buying an asset and selling it later at a higher price.
Bull Market Definition
A bull market is defined as a rise of 20% or more in a broad market index over at least a two-month period. Bullish market meaning, essentially, is a continued period, usually months or years, when prices rise.
The term bull market is often used in reference to the stock market, but other asset classes can have bull markets as well, such as foreign currencies, commodities, or bonds. So for a currency pair such as EURUSD we can say a bull market is occurring if the EURUSD price has risen 20% in two months.
For a stock market, the performance of a broad market index should be checked to verify a bull market is in effect. For example, for a Japanese stock market it can be said that Japan’s stock market is in a bull cycle if the Nikkei 225 Japanese stock index has risen 20% in two months.
Main Characteristics of Bull Markets
Bull markets can be identified by certain features that characterize them.
Sustained Increases in Asset Price
As the definition says, a bull market is associated with sustained increases in an asset price. So, the main characteristic of a bull market is sustained increases in asset price. Therefore, a bull market in stocks for American securities occurs with an increase of 20% or more in a broad US stock market index - such as the S&P 500 - over two months or more.
High Investor Confidence
During a bull market, investors feel confident in the strength of the market and its future performance. High investor confidence in bull markets is understandable - asset price increases indicate presence of a strong trend which more likely will continue until market conditions undergo substantial change and the trend ends.
In a bull market in stocks investors usually buy more stocks and hold onto their investments as share prices are bid up.
A bull market is usually accompanied by a strong economy. The presence of a strong economy is easier understood for a bull market in stocks.
Strong Economy
Share prices rise when companies are doing well – they report rising sales and earnings and issue improved forecasts. Strong company performance translates into growing gross domestic product (GDP), and as companies do well they hire more employees - which means the economy records low unemployment levels as well as positive performance in other key economic data.
Difference Between Bull and Bear Market
Asset prices can also move in direction opposite to the trend in bull markets, in other words they can also move down. And when prices fall for a prolonged period of time it is called a bear market.
More precisely, when prices fall 20% or more for a period of time it is called a bear market. In many ways bear markets are the opposite of bull markets – they have opposite characteristics and features are reversed. Thus, bear markets mark market downturns while bull markets represent market upturns.
In bear markets investors have low confidence in related assets. For example, suppose we have a bear market in AUDUSD. This means that the value of Australian dollar in terms of US dollars is declining for a long period of time, resulting in 20% drop in AUDUSD price. This means that investors’ confidence in Australian dollar is low and has been deteriorating which results in selling of the Australian dollar.
In case of a bull market in AUDUSD the opposite would be true: the value of Australian dollar in terms of US dollars will be rising for a long period of time, resulting in 20% rise in AUDUSD price. This would signal that investors’ confidence in Australian dollar is high and has been improving, which would result in buying of the Australian dollar.
And in bear markets countries usually experience economic decline – the opposite of what happens in bull markets. In case of an AUDUSD bear market taking place, the Australian economy may be experiencing slowdown, most likely accompanied by slowing or declining production and GDP, as well as higher unemployment.
Whereas in a bull market in AUDUSD the opposite would be true: the Australian economy may be speeding up, most likely accompanied by expanding production and GDP, as well as lower unemployment.
Bear and bull markets differ also in their duration. Historic data show that bull markets in stocks usually last longer than bear markets in stocks. However, it’s noteworthy that there have been just as many bull markets as bear markets since 1928.
Bull vs. Bear Markets by Examples
The most widely known bear market in history is of course the Great Depression. The Depression was the longest and deepest downturn in the history of the United States as well as the modern industrial economy.
The Great Depression began in August 1929. It lasted for ten years until 1939, causing drastic declines in output, severe unemployment, and acute deflation – the opposite of inflation - in almost every country of the world. While it was a prolonged period of hardship for majority of the world population, many prominent industrialists – like William Boeing and Walter Chrysler - made their fortunes during Great Depression.
It is noteworthy that the Great Depression followed the bull market of Roaring Twenties. The decade before the Great Depression - approximately from 1921 to 1929, was named Roaring Twenties as it was marked by growing prosperity in the Western world.
The economic growth in that period was not extraordinarily high – for example in the US the GDP per capita went up from roughly $10,000 to almost $12,000 just before the 1929 stock market crash. However, this period ensued the World War I and the economic growth occurred against the backdrop of high social tensions as lack of jobs for returning veterans led to widespread strikes.
The successful transition from a wartime to a peacetime economy was accomplished by a rise of consumer credit like loans for mass-produced cars like the Model T Ford. The expanding consumer credit also was instrumental in supporting widespread adoption of variety of home appliances developed in and made accessible in the period marked by the spread of electricity.
Thus the consumerism propelled the economic recovery. The period of growing prosperity contrasted favorably with the decade of sluggish growth encompassing the WWWI: in 1921, US real income per capita was roughly at its 1906 level.
