What it means
No official committee declares a bull market, which is why the 20% rule of thumb is used. It is normally applied to a broad market index rather than a single share, and it is measured from the lowest closing point of the previous decline.
Bull markets are usually driven by a mix of rising company profits, stable or falling interest rates and improving confidence. The last ingredient is the least rational and often the most powerful, because rising prices attract buyers who then push prices higher still.
For a business rather than an investor, a bull market changes the cost and availability of money. Valuations rise, so raising equity costs less in terms of the ownership given away, acquisitions become more expensive to make, and share based pay looks more attractive to employees.
The practical difficulty is that bull markets are obvious only in hindsight. The 20% threshold is crossed long after the actual turning point, and every long bull market contains corrections of around 10% that feel at the time like the start of a collapse.
It is worth separating the market from the economy. Share prices reflect expectations of future profits, so a bull market can begin while unemployment is still rising and can end while the economy still looks healthy.
In practice
Real-world examples.
Example
A pension trustee reviewing a scheme after three years of rising markets finds the equity allocation has drifted from 60% to 71% simply because shares outperformed. The trustees rebalance back to target, accepting that this means selling into strength.
Example
A private technology company delays its fundraising by two quarters as public market valuations climb. When it eventually raises $30,000,000, the improved valuation means the founders give away 15% of the company rather than the 22% they had modelled a year earlier.
Example
A finance director notices that share options granted to staff two years ago are now deeply in the money after a long market rise. She warns the board that a wave of exercises is likely and models the resulting dilution before the next remuneration review.
Think of it
“A bull market is when prices rise significantly and keep rising-widespread optimism dominates.
Formula
Calculation
Gain from the trough = (current index level - trough index level) / trough index level x 100
A broad share index falls to a closing low of 3,200 points during a downturn. Nine months later it closes at 3,840, so the gain is (3,840 - 3,200) / 3,200 x 100 = 640 / 3,200 x 100 = 20%, and by the usual convention a bull market is confirmed as having begun at the 3,200 low.
If the index later reaches 4,480, the gain from the trough is (4,480 - 3,200) / 3,200 x 100 = 1,280 / 3,200 x 100 = 40%. An investor who put $50,000 into an index tracker at the low would hold $50,000 x 1.40 = $70,000, before dividends, fees and tax.
Note that the same 20% test applied on the way down needs a different base. A fall from 4,480 back to 3,584 is (3,584 - 4,480) / 4,480 x 100 = -20%, which would mark the start of a bear market even though the index is still well above its old trough.Case study
Seen in the real world.
This is an illustrative and entirely fictional case. Kestrel Analytics, an invented software business, spent three years watching a strong bull market and concluded that its own valuation multiple would keep climbing indefinitely. It deferred a planned share sale twice, each time expecting a better price.
In the fictional scenario the market peaked, fell 28% over the following eight months and the company's sector fell further. Kestrel eventually raised the money it needed at roughly two thirds of the valuation available eighteen months earlier, diluting existing shareholders considerably more than planned.
The illustrative lesson the board drew was not that market timing is impossible, but that funding decisions should follow the business's cash needs rather than a view on where prices are going. It adopted a policy of raising capital when it had twelve months of runway left, regardless of market mood.
Watch out
Common mistakes.
- Treating any two or three good months as a bull market, when the definition requires a sustained rise of at least 20% from a low.
- Confusing a bull market with a strong economy, since share prices move on expectations and can rise while output and employment are still weak.
- Increasing risk after a long rise on the assumption that the trend will continue, which tends to concentrate exposure at exactly the wrong moment.
Questions
People also ask.
How long do bull markets typically last?
There is no fixed length, and historically they have run anywhere from a couple of years to more than a decade, which is why duration alone is a poor timing signal.
Does a bull market mean every share is rising?
No, broad indices can climb while whole sectors fall, and gains are often concentrated in a relatively small number of large companies.
What ends a bull market?
Usually a change in the outlook for profits or interest rates, sometimes triggered by a specific shock, though the precise cause is rarely agreed until well afterwards.
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