Bull Market

A bull market is a sustained period of rising prices in an index or a market, conventionally described as beginning once prices have risen roughly 20 percent from a recent low and continuing until they have fallen roughly 20 percent from a subsequent high. The threshold is not purely editorial: the Securities and Exchange Commission's own investor glossary describes a bull market as a time when stock prices are rising and sentiment is optimistic, occurring "generally" when there is a rise of 20 percent or more in a broad market index over at least a two-month period. That is investor education rather than a rule, it appears nowhere in the Code of Federal Regulations, and it says nothing about when a bull market ends. The end condition above is the commentators' convention rather than the regulator's, and both the start and the end still depend on choices someone has made about which index to use and which low to measure from.

The two labels are defined against each other, which produces an awkwardness worth noticing. A bull market conventionally starts at the low point that ended the previous decline, but that point is only identifiable once prices have risen enough to make it a low. The start date is therefore assigned backward from a threshold crossed later. It is a real description of what happened; it is not a signal that existed at the time.

The most consequential misuse of the term is treating its age as information. Financial commentary regularly describes a bull market as "long in the tooth" or "mature", which imports an intuition from biology that markets do not share. The number of years since a prior low is a fact about history. It does not carry a probability about the next year, and a rise does not become more fragile because it has continued. Anyone reasoning from the age of the label to a forecast has substituted a metaphor for evidence.

What is genuinely worth attending to during a rising market is what happens inside a portfolio rather than what happens to the label. If a portfolio is built to hold a set proportion of stocks and bonds, a long rise in stock prices pushes that proportion up without anyone deciding anything, because the fastest-growing holding becomes the largest one. The portfolio ends up carrying more risk than its owner chose, at the point in the cycle when that extra risk is least visible. Rebalancing exists to address exactly this, and its mechanics belong to its own page.

The psychological half is the mirror image and reinforces it. Recency bias is the tendency to give the most recent stretch of experience disproportionate weight when forecasting, so a run of good years quietly raises everyone's expectations and lowers their sense of what a bad year would feel like. The practical consequence is that a judgment about how much risk you can live with is least reliable at exactly the moment a long rise invites you to revisit it. A written allocation, decided once and reviewed on a schedule rather than in response to results, is the usual defense.

Two smaller vocabulary points. Dating the start is structurally harder than dating a decline, because a decline is measured from a high that already existed while a rise is measured from a low that only becomes a low once prices have left it behind. Two approaches are in circulation as a result, starting from the prior trough or waiting for a new all-time high, and they produce different start dates for the same episode. And the terms are used for indices, sectors, individual stocks, commodities and even bonds, where the 20 percent convention makes considerably less sense, so the phrase travels further than the arithmetic behind it does.

Finally, a rising market says nothing directly about the economy, in the same way its counterpart does not. Prices reflect expectations about future earnings, while economic measures record what has already been produced and earned. The two are related and they are not the same measurement, which is why a strong market can coexist with weak employment and vice versa.

The arithmetic mirrors the downside convention. Take an index level at a prior low, take the level now, and express the rise as a percentage of the low. Once that figure reaches about 20 percent, the period is conventionally described as a bull market, and it is conventionally described as having ended once prices have fallen about 20 percent from a subsequent high.

A hypothetical illustration of the drift that matters more than the label. Suppose Rosa starts with $600,000 in stocks and $400,000 in bonds, a 60/40 split of a $1,000,000 portfolio. Over several years the stock holding grows to $1,050,000 while the bonds grow to $460,000. The portfolio is now worth $1,510,000 and the stock share is $1,050,000 of it, which is a little over 69 percent. Rosa has bought nothing and sold nothing, and she is now carrying materially more equity risk than the allocation she chose. What to do about that, and how to do it without an unwanted tax bill, is the subject of rebalancing. All figures are illustrative.

The reason the drift belongs on this page rather than only on the rebalancing page is that it is not random. It is a systematic consequence of a long rise, and it is largest exactly when the recent record makes the higher risk feel least alarming. The rising phase and the psychological conditions that make it hard to act are the same phase.

What the term is good for

• It gives a shared shorthand for the episodes of sustained gain that shape how a generation of investors expects markets to behave.
• The arithmetic is transparent and checkable against published index levels.
• Naming the phase makes the drift question concrete, because it prompts someone to look at their actual allocation rather than the one they think they have.
• It keeps rises and falls in the same frame, which makes it harder to treat every decline as exceptional.

Where it misleads

• The start date is assigned backward from a low that was not identifiable at the time, so it was never a signal.
• Its age is routinely presented as though it carried a probability about the future, which it does not.
• Dating conventions differ, with some commentators starting from the prior trough and others requiring a new high, so the same episode can be several years older in one account than another.
• It is applied to sectors, individual stocks and bonds where the 20 percent convention has little meaning.
• It is read as a statement about the economy, which it is not.