What Is a Bull Market: Risks, Bullish/Bearish, Emotions, & Guide


When investors and advisers talk about the financial markets, they like to use industry-specific jargon. Financial experts and financial media often use words such as “bull market”, “bear market” and “risk” to describe the prevailing market conditions or fears. But what is a bull or bear market? In this article, I explain one of these industry-specific concepts: bull market.

So, what is a bull market?

Bull market is a word used when the stock market and the trend is upwards. The definition of a bull market is usually that the stock market must have risen above 20 percent in the course of at least two months. Bull market means that investors and traders are positive for the future. Other words and terms for ups and downs on the stock market are Hausse (rise) and Baisse (decline). The opposite of the bull market is bear market.

What characterizes a bull market?

Bull markets are periods – often several years – when stock prices generally rise in the long term. Under bull markets, the stock market index and stock valuations are rising overall.

Bear markets, on the other hand, are defined as periods – often between around six months and two years – when certain fundamental factors push down share prices by 20 percent or more.

The exact definitions vary slightly depending on who you ask, but the broad definition is that when the stock market goes up it is a bull market, and when the stock market goes down it is a bear market.

But it is important to be clear that bull markets do not go up in a straight line.

The stock market normally encounters bumps or potholes along the way, often created by exaggerated fears among investors.

Some of these pits in bull markets are called “corrections”. Corrections – which we characterize as short, sentiment-driven declines of 10–20 percent – often begin quickly.

Because they are usually driven by fear, they can come at any time, with or without reason, and are usually steep and fast.

Once they have passed, stock prices can quickly resume the previous uptrend, something that can make it unprofitable to try to spot bull market corrections.

As bull markets mature, investors’ sentiment – that is, how they feel – becomes more optimistic. It can be difficult to determine the emotional state of a large group of investors.

Some of the things I look at to gauge sentiment are how many IPOs are underway, company income or gains, and inflows and outflows for funds (ie whether investors deposit or withdraw money from funds).

When markets rise and people feel more secure investing in the market, inflows into funds tend to increase, so fund inflows may indicate that investors’ sentiment is more optimistic.

And after a downturn, investors may be afraid of losing money and redeeming their fund units or selling other securities.

This pessimistic view often leads to investors losing early bull market returns, which can reduce their ability to achieve their long-term financial goals.

The importance of investor sentiment

When looking at historical graphs, it may seem easy to stay invested in a bull market, all the way from bottom to top. But investors are often unaware of the potentially paradoxical or backward nature of investor sentiment.

Sir John Templeton described how investor sentiment is linked to the market cycle as follows: “Bull markets are born of pessimism, grow with skepticism, mature with optimism and die of euphoria.”

Investors are often most pessimistic at or near the bottom of a bear market. When the trend in the market has been downward for a long time, investors tend to have excessively gloomy expectations – a sign of pessimism.

When prices start to rise overall, the skeptical phase begins where investors are hesitant to start investing again.

Despite widespread skepticism, companies continue to exceed the overly gloomy expectations, and more and more investors are entering the market as prices continue to rise, and the mood changes to optimism.

When optimism prevails, stock prices rise steadily, investors raise expectations of corporate profits and investors begin to worry about missing out on future returns.

The last stage of a bull market is euphoria.

When investors let go of all inhibitions and chase after the latest hot investments, the euphoria may cause them to overlook fundamental economic problems and look for reasons why the stock market will continue to rise.

Emotions and preconceived notions are often the worst enemy of investors. Because investing is not something intuitive, people often sell stocks when they should be holding them or buying more.

Making poorly timed investment decisions based on gut feeling can prevent you from reaching your longer-term investment goals.

Bull or bear market: When to invest in a bull?

If you are “bullish”, you are optimistic and are convinced that the stock market will rise in the foreseeable future. History shows that bull markets last longer and give stronger returns, on average, than bear markets back.

Seen from 1949 onwards, bull markets on the S&P 500 have lasted from 26 to up to a full 113 months. [I] Since 1946, there have been 11 bear markets on the S&P 500 with an average decline of 34 percent and an average duration of 16 months.

[Ii During the same period, the bull markets on the S&P 500 (excluding the current one) were on average almost five years long and rose by an average of 149 percent. [Iii]

During bear markets, investors who act emotionally driven tend to sell off their investments near the market bottom. Due to the losses they have suffered, these investors may be reluctant to invest again when the bull market starts.

They want stronger evidence that recovery is not a temporary setback. While sitting on the bench, they miss the first bit of the bull market, which often involves real upswings.

This mistake can be extra costly because investors often persevere for a long time in the downturn but miss the initial recovery that would have helped them make up for the losses and get them back on track on the road to their long-term goals.

If you do not participate in this initial upswing in a bull market, you may end up and even risk not reaching your long-term financial goals.

Types of risks

This is another reason why emotion-based reactions to market developments can be costly in the long run.

Investment involves many different types of risks. One of the most overlooked risks is the risk of not achieving the long-term growth you need to achieve your long-term goals.

It can cost to miss early stock market rises, but it is a cost that many investors do not think about.

It can increase the risk that your growth will not be high enough to take you to your long-term financial goals.

Conclusion

One of the biggest challenges in investing: No one can say exactly when a bear market will end. It only becomes clear afterwards.

However, my analysis of market history indicates that emerging bull markets have some common denominators. An important common denominator: Bull markets usually start when investor sentiment is very pessimistic.

In my view, this means that you must be prepared to invest when it feels most difficult, provided that you need the return that equities offer for your portfolio and that you are comfortable with volatility.

Sources

https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/abs/decline-of-inflation-and-the-bull-market-of-19821999/8A6BA3EE7BE1F74551B4B09226129124

https://www.proquest.com/openview/3f009ffee8ad8d1cdddb5f8f283ba114/1?pq-origsite=gscholar&cbl=49137

https://www.jstor.org/stable/23702966

https://eric.ed.gov/?id=EJ258281

https://www.tandfonline.com/doi/abs/10.1080/07350015.2000.10524851

https://www.sciencedirect.com/science/article/abs/pii/S1059056004000322

https://www.tandfonline.com/doi/abs/10.1080/07350015.2012.680412

https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/abs/stock-price-movement-associated-with-temporary-trading-suspensions-bear-market-versus-bull-market/FC55165D3BC4178C01A2F56CDD77C3F3

https://go.gale.com/ps/i.do?id=GALE%7CA80118062&sid=googleScholar&v=2.1&it=r&linkaccess=abs&issn=00475394&p=AONE&sw=w&userGroupName=anon%7Ec7363f15

Kevin

This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policies.

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