Bull Market

A bull market is a market characterized by rising prices for securities, usually stocks, within a context in which market participants are optimistic that the trend increase in the value of the market index will continue for some time to come. It is therefore the exact opposite of a bear market, not only in the direction of price changes, but also in the psychology of investors. A bull market is as much a state of mind exhibited by participants in the market as it is an indication of underlying economic conditions. The essential feature of a bull market is that investors make decisions based not on the value of the assets they are buying but, rather, on the general feel-good factor being displayed within the market. A bull market arises when investors develop a sense that the risk-return structure of the market has shifted in favor of higher rates of return. Such temporary losses of risk aversion can lead to self-fulfilling dynamics: The assumption that investors exist within a bull market leads to expectations that investments will prove profitable, such expectations lead investors to trade assets at increasingly inflated prices, the evidence of which deepens the assumption that bull market conditions are in operation.

As with bear markets, bull markets pose difficulties for public policymakers. Such problems have become particularly acute in recent years, as the social basis of stock market trading has changed throughout the advanced industrialized world. An ever-greater number of people have become increasingly exposed to the dominant pattern of stock market trading. For some, such exposure has been consciously accepted through attempts to diversify savings away from simple interest-bearing bank accounts. For others, increased exposure has been less conscious, being an unintended consequence of having a mortgage and a private pension plan. During a bull market, the upward momentum in prices gives the ostensible impression that investors have become relatively immune from taking losses. This encourages more people to invest more of their savings on the stock market; the period preceding the end of the bull run in 2000 coincided with the largest ever increase in household debt in the countries with the most liquid stock markets. Much of the bull run itself, particularly in the United States, was triggered by margin debt—that is, borrowing against other assets, often homes, to buy stocks. The concern for policymakers is that households may over-invest in a bull market, such that once confidence in the market ebbs and prices begin to fall, they are left with uncoverable levels of debt. Policymakers have few possible responses to prevent this happening. Bull markets have proved relatively immune to interest rate increases [Page 56]designed to deter further money from being invested in the market. This leaves policymakers with only the option of urging caution, warning households of the risks they face if they over-invest in a bull market that comes to an abrupt end.