What Is a Bull Market? Definition, Indicators, and Examples

It’s essential to understand the definition of investment terms like “bull market” if you plan to invest in the stock market or have investments through retirement funds. As a result of the volatility brought by COVID-19 and its impact on the world economy, financial news outlets have been discussing bull markets and bear markets.

Bull market definition

A bull market describes an upward trend in stock market prices over a given period. People describe bull markets both in terms of years and months. A market is in its bull phase after a 20% increase over a given period and is typically preceded by at least a 20% decrease.

Bull market vs bear market

On the other hand, a bear market indicates a downward trend in stock market prices over months or years. In an opposite fashion to bullish markets, a market is in its bear phase after suffering a 20% decrease in prices, typically preceded by a 20% or more increase in prices.

Bullish stock meaning

If you read investment analysis, you may come across analysts that say they are “bullish” about a stock. This means that the analyst believes that the stock will perform well. If analysts believe that a specific stock price will decrease in the future, they say they are “bearish” about a stock.

Low-interest rates

One condition that can lead to a bull market is a low-interest-rate environment. Lower interest rates mean debt costs are affordable, making it easier for businesses to borrow money.

When central banks announce lower interest rates, this can increase company valuations, as investors assume the cost of debt will be lower for the foreseeable future. Yet, if interest rate decreases are more significant than the market expects, this can also lead to a reduction in stock prices.

Market stability

Market stability can increase consumer and investor confidence, which is a key element of a bull market. If stakeholders in a market feel confident that the conditions will remain predictable in the near future, they are more likely to invest.

Low unemployment figures, GDP growth, and other factors can stabilize a market. Events such as elections, natural disasters, policy changes, and increases in unemployment can lead to market instability.

Business profitability

There’s no doubt that good financial returns play a role in bull markets. If businesses are returning solid profit margins, this can increase stock prices. As companies increase profits, they can invest in future growth and issue dividends to their shareholders. Keep in mind, some bull markets can lead to frenzies, which result in bubbles that exceed earnings.

Investor confidence

Investor confidence is one of the most notable characteristics of a bull market. Investors who are confident in the market are more likely to invest their capital. As capital floods into the stock market, it increases trading that can improve stock prices.

Likewise, when investor confidence is high, it’s easier for companies to raise money. This allows companies to invest more money into growth and production. Low-interest rates, strong profitability, clear regulation, and other factors can all improve investor confidence.

International investors

Globalization resulted in an increase in trade across the world and has made international investment more prevalent.

If a particular economy or stock market is performing well, it is likely to attract the attention of foreign investors. These investors can provide capital injections that improve prices in a stock market. Markets that are attractive to foreign investors – due to strong legal frameworks, reliable market conditions, and other factors – benefit from capital inflows.

Top-line growth

When you hear investors refer to “top-line growth,” they are speaking about an increase in a business’s top-line revenue, which is the overall revenue or turnover for the company. Bull markets will often see businesses increase their overall revenue.

As an economy’s top-line growth typically coincides with GDP increases, it can point toward an economy with healthy demand. This can improve investor confidence and create conditions for good economic performance.

Bottom-line growth

However, top-line growth alone does not necessarily indicate a strong economy. If businesses are only achieving top-line growth because they are overspending to achieve sales, this can be bad for stock prices. For this reason, “bottom-line growth” – or growth in profits – is also essential to explore.

Price-to-earnings ratio (P/E)

A stock’s price-to-earnings ratio (P/E) is the stock’s price divided by the same company’s earnings per share. This is one of the indicators that investors use to determine if they want to invest in the market.

For example, if a business earns $1 billion per year and has 1 billion shares, its earnings per share are $1. If the same business’s stock price is $10, then you divide the $10 stock price by 1 (the EPS) for a P/E ratio of 10.

A P/E ratio can help investors decide if a company is overvalued. While acceptable P/E ratios depend on industries and other factors, this is always worth considering if you are investing in bull markets.

One of the most striking examples of a bull market is the post-war boom that the United States experienced after WWII. While there’s no doubt that the war created untold losses for many American families, the need for advanced technology and machinery and many other factors created strong economic conditions once the war was over.

The United States had used its manufacturing strength to win the war, and this ability to be productive yielded solid results for both export and domestic markets. While the government no longer needed the same number of weapons, the factories used to supply the military could now be reconverted into hubs for producing consumer goods.

As technology made its way into US homes and factories, the domestic economy benefited from an efficiency boom that helped market conditions. The S&P 500 saw an increase of more than 260% in this time period. Unfortunately, the potential for inflation began to enter the economy in 1956, which caused the Federal Reserve to increase interest rates. This resulted in a reduction in stock market prices that ended the bull run.

In the early 1980s, Ronald Reagan inherited an economy that was in deep turmoil. With high unemployment and inflation at around 10%, American families were struggling financially. The Federal Reserve had pushed higher interest rates to combat inflation, which had consequences for the business landscape. It was in these circumstances that Reagan made his famous tax cuts. At the time, the top federal tax rate was 70% and Reagan reduced this to 50%.

While there is little doubt that Reagan’s tax cuts worked to boost the economy and create the bull run, other factors are also relevant. At the same time as the tax cuts, Reagen increased federal spending on infrastructure and defense. The Federal Reserve also lowered rates, and this provided much-needed stimulus to the economy.

However, toward the end of the 80s, economic conditions worsened again. In October of 1987, the stock market crashed, resulting in more than 20% of losses in the Dow Jones in a single day.

In 1990, a bull run began due to favorable corporate earnings results and the introduction of various tech companies. Toward the end of the decade, the bull market turned into a frenzy. Tech companies began to receive outlandish valuations, driving huge returns in the stock market for initial investors.

An IPO-mania began, which saw further growth in the tech sector. New founders became multi-millionaires by listing their companies on the stock exchange, and the same rang true for tech companies with more established profiles.

In fact, from 1995 to 2000 alone, NASDAQ company stock prices grew more than 400%. However, while the bull run ended in 2000, the full crash did not occur until 2002. When the bubble burst, it wiped out many tech companies that previously had strong valuations.

The longest bull market in modern American history is much more recent than you may think. It extended from March 2009 to March 2020.

The years preceding this bull run witnessed the subprime mortgage crisis that resulted in economic loss and turmoil throughout the world. The pain caused by the economic crisis resulted in extremely low-interest rates and other favorable economic conditions. The access to cheap capital allowed businesses to invest and corporate earnings improved. Over the 131 months included in this bull run, the S&P 500 grew more than 400%.

Unfortunately, as with all previous bull markets, this positive trend came to an end. At the start of 2020, when COVID-19 sent markets downward and shut the world’s economy, this bull run was finally over. This is an example of how outside forces can wreak havoc on economies, even if previous economic conditions appear positive.