What Is a Bull Market? Understanding Market Cycles
Understand bull and bear markets, how market cycles work, and how to invest wisely during each phase. Includes historical examples from Australia and global markets.
By James Whitfield, Personal Finance Editor
Understanding Market Cycles
Financial markets move in cycles of optimism and pessimism, expansion and contraction. Understanding these cycles helps you make better investment decisions and, crucially, avoid costly emotional mistakes.
What Is a Bull Market?
A bull market is a sustained period of rising asset prices, generally defined as a 20% or greater increase from a recent low. Bull markets are characterised by:
- Growing economic confidence and GDP expansion
- Rising corporate earnings
- Low unemployment
- Increasing investor optimism (sometimes tipping into euphoria)
- Higher trading volumes as more investors enter the market
What Is a Bear Market?
A bear market is a sustained decline of 20% or more from a recent peak. Bear markets bring:
- Widespread pessimism and fear
- Economic slowdown or recession
- Falling corporate earnings
- Rising unemployment
- Panic selling and capitulation
Historical Australia Market Cycles
The FTSE 100 has experienced several significant cycles:
- 2000–2003 (Bear): Dot-com crash — FTSE 100 fell from 6,930 to 3,287 (-52%)
- 2003–2007 (Bull): Recovery driven by credit expansion — FTSE 100 rose to 6,732
- 2007–2009 (Bear): Global financial crisis — FTSE 100 fell to 3,512 (-48%)
- 2009–2020 (Bull): Longest bull market in modern history — FTSE 100 reached 7,674
- 2020 (Bear): COVID-19 crash — FTSE 100 fell 34% in just 23 trading days
- 2020–present (Bull): Recovery driven by stimulus and economic reopening
The critical lesson: every bear market has been followed by a recovery. Investors who panicked and sold at the bottom missed the subsequent gains.
How to Invest Through Market Cycles
In Bull Markets
- Continue your regular investment plan — do not try to time the top
- Rebalance periodically to prevent overexposure to overheated sectors
- Maintain your target asset allocation
- Be cautious of euphoria — when everyone is talking about investing, risk is elevated
In Bear Markets
- Keep contributing — you are buying at lower prices
- Do not panic sell — this is the single most costly mistake
- Review your risk tolerance — if you cannot sleep at night, your allocation may be too aggressive
- Look for opportunities — quality assets at discounted prices
The Danger of Market Timing
Research consistently shows that missing just a handful of the best trading days dramatically reduces returns. A study by JP Morgan found that missing the 10 best days in the S&P 500 over a 20-year period reduced returns by more than half. The best days often occur during or immediately after the worst periods — precisely when scared investors are most likely to be out of the market.