Understanding Bull Markets


When it comes to discussing financial markets, investors and advisors will likely encounter industry-specific jargon. Financial professionals and financial media outlets often use terms such as “bull”, “bear” and “risk” to describe prevailing market conditions or fears. But what is a “bull” or a “bear” when used in this context? In this article, we aim to provide clarity on one of these industry-specific terms: bull markets.

Bull Market Characteristics

Bull markets are periods—likely multiple years—when equity prices generally rise in the longer term. During bull markets, equity market indexes and equity valuations generally rise.

However, it’s crucial to understand that bull markets generally don’t rise in a straight line. Equities normally encounter bumps or drops along the way, usually driven by overblown investor fears. We call some of these bull market drops “corrections”. Corrections—what we characterize as short, sentiment-driven drops of 10% to 20%—often start quickly. Because they are usually fear-driven, they can be happen at any time for any or no reason and are normally sharp and swift. When they are over, equity prices may quickly resume their upward trend, which can make trying to time bull market corrections a futile exercise.

As bull markets mature, investor sentiment—how investors feel—becomes more optimistic. Whilst it can be difficult to gauge the emotion of a large group of investors, some examples of things we monitor are initial public offering (IPO) activity (private companies going public to raise capital), corporate earnings or profits and fund inflows and outflows (investors putting money into funds and investors pulling money out of funds). Fund inflows, for instance, can help show investor sentiment because as markets rise and optimism increases, investors become more comfortable putting their money into the market and fund inflows can increase. However, after a downturn investors fear losing money and may sell off their funds or other securities. This pessimistic outlook often causes investors to miss out on early bull market returns, potentially reducing their ability to meet their long-term financial goals.

The Importance of Investor Sentiment

When you look at historical charts, it may appear easy to stay invested during a bull market from bottom to top. Investors are often unaware of the potentially counter-intuitive or contrarian nature of investor sentiment. Sir John Templeton, well-known investor, fund manager and philanthropist, described investor sentiment and its relation to the market cycle, saying, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

Exhibit 1: The Market Sentiment Life Cycle

Templeton Curve

The above is intended to illustrate a point and does not reflect actual returns or market behaviour.

We define bear markets as periods—often ranging between roughly six months to two years—in which some fundamental factors drive equity prices downward approximately 20% or more. Whilst the definitions may vary across the industry, the general distinction is that bull markets are rising markets, and bear markets are falling markets.

Investors are often most pessimistic at or near the bottom of a bear market. After the market has endured a sustained downward trend, investors tend to have overly dour expectations—a sign of pessimism. When prices begin to rise consistently, skepticism begins, as investors are hesitant to invest again. Despite widespread skepticism, companies continue to beat overly dour expectations and more investors step into the market as prices continue to rise, creating optimism. During optimism, equities are on a stable rise, investors raise expectations for regular company earnings and investors start to develop a fear of missing out on future returns.

The final stage in the Templeton’s cycle is euphoria. As investors throw caution to the wind and look for the next hot investment, euphoria can lead them to dismiss fundamental economic issues and continue to look for reasons why the market should continue rising. Emotions and biases are often investors’ nemeses. Because investments aren’t intuitive, investors often sell equities when they should be holding or buying. Making poorly-timed investment decisions based on emotion can threaten your ability to achieve your longer-term investment goals.

Bull vs. Bear: When to be Bullish

Being bullish is a form of optimism and means believing the market will rise in the foreseeable future. History has shown bull markets last longer and returns are stronger, on average, than bear markets’ losses. Dating back to 1949, S&P bull markets have lasted from 26 months to as many as 113 months.i Since 1946, there have been 11 S&P bear markets with an average decline of 34% and an average duration of 16 months.ii During the same period, S&P bull markets—not including the current one—have averaged nearly five years in duration and 149% in the S&P 500 Price Index.iii

During bear markets, investors who act on emotion typically sell their investments near market lows. Due to the losses incurred, investors may be reluctant to invest again when the market initially rebounds. They want more proof the rebound isn’t just a temporary bounce. As they wait on the sidelines, they miss out on the often steep bull market beginning. This mistake can be especially costly because investors often endure much of a downturn, and miss the initial rebound, which can help them recoup some of their losses—further detracting from their longer-term returns. Missing this initial upswing can set investors further back and may even prevent them from reaching their long-term financial goals. That’s one more reason why reacting emotionally to market developments can be costly in the long run.

Investments come with many different risks. One of the most overlooked risks is the risk you don’t achieve the necessary growth you need to achieve your long-term goals. Missing the initial upswing can be costly and many investors don’t account for this cost.

How We Can Help

Fisher Investments Canada helps navigate capital markets for clients and answer client questions along the way. To learn more, download one of our guides or speak with one of our experienced professionals today.


i Source: Global Financial Data, as of 2/5/2018; S&P 500 Index Price Level from 5/29/1946 – 12/30/2013. FactSet, as of 2/5/2018; S&P 500 Index Price Level from 1/1/2014 – 2/2/2018. For “Duration,” a month equals 30.5 days. Returns are presented exclusive of dividends, and in terms of US dollars. Currency fluctuations between the US dollar and the Canadian dollar may result in higher or lower investment returns.

ii Source: Global Financial Data, as of 2/5/2018; S&P 500 Index Price Level from 5/29/1946 – 12/30/2013. FactSet, as of 2/5/2018; S&P 500 Index Price Level from 1/1/2014 – 2/2/2018. For “Duration,” a month equals 30.5 days. Returns are presented exclusive of dividends, and in terms of US dollars. Currency fluctuations between the US dollar and the Canadian dollar may result in higher or lower investment returns. Based on the definition that a decline of 20% or more constitutes a bear market.

iii Source: Global Financial Data, as of 2/5/2018; S&P 500 Index Price Level from 5/29/1946 – 12/30/2013. FactSet, as of 2/5/2018; S&P 500 Index Price Level from 1/1/2014 – 2/2/2018. For “Duration,” a month equals 30.5 days. Returns are presented exclusive of dividends, and in terms of US dollars. Currency fluctuations between the US dollar and the Canadian dollar may result in higher or lower investment returns.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns.