Bull Market

Cycle dating begins with identifying turning points in a price series, usually the closing levels of a broad capitalisation-weighted index such as the S&P 500 or MSCI World. A trough is the lowest close before a sustained advance; a peak is the highest close before a sustained decline. The 20% convention is applied to the arithmetic price change from trough to a later close: divide the current index level by the trough level, subtract one, and express as a percentage. Once that figure exceeds twenty, commentators declare a bull market in progress and backdate its start to the trough itself.

This makes cycle labels a description of history rather than a forward signal. The trough is only known to be a trough after prices have refused to revisit it, so the phase is named well after the profitable entry point has passed. Different providers also use different inputs: price returns or total returns, daily closes or month-ends, single-country or global indices. The same decade of data can therefore yield different cycle chronologies.

Equity returns over a period can be broken into three components: the dividend yield received, the growth in earnings per share, and the change in the price-to-earnings multiple investors are willing to pay. Early in a bull market the multiple usually does the heavy lifting, because prices recover before reported profits do. Later, earnings growth carries more of the load while valuations plateau or drift higher.

The multiple component reflects the discount rate. In a constant-growth dividend model, value equals next period's dividend divided by the required return minus the growth rate, so any fall in the required return raises value sharply when the denominator is small. Bull markets typically feature both a lower risk-free rate and a compressed equity risk premium as investors demand less compensation for uncertainty. That compression is the mechanical link between improving sentiment and higher prices, and its reversal is what makes late-cycle drawdowns violent.

Bull markets leave fingerprints beyond the index level. Breadth measures, such as the share of constituents above their two-hundred-day moving average or advance-decline lines, tend to be strong in the early phase and narrow as leadership concentrates in fewer large names. Cyclical sectors, small capitalisations and higher-beta stocks typically lead off the trough, since their earnings are most sensitive to recovering demand.

Cross-asset confirmation matters as much as equity prices. Corporate credit spreads narrow, implied volatility indices settle at low levels, and primary issuance revives: IPO counts, secondary offerings and merger activity all expand as issuers exploit receptive valuations. Fund flows, margin borrowing and retail account openings usually rise with a lag, which is why they function poorly as timing tools. Analysts read these series together, because index gains driven by a handful of names with widening credit spreads behind them describe a fragile advance.

Treat the term as market vocabulary rather than a valuation input. You should be able to state the convention and its limitations, distinguish a bull market from the expansion phase of the business cycle, and explain why equity markets often turn upward while output, employment and earnings are still contracting. You should also be able to separate a genuine new cycle from a sharp counter-trend rally inside an ongoing decline, recognising that only subsequent price action resolves the distinction.

The behavioural dimension is examinable in its own right. Prolonged advances feed recency bias, overconfidence and herding, encouraging investors to extrapolate returns and drift away from strategic asset allocation. Disciplined rebalancing mechanically trims the appreciated asset class, which feels wrong in a bull market and is precisely the point. Candidates should also connect rising valuations to lower expected forward returns, since price and subsequent return are inversely related at the level of long-horizon estimates.