Over the last year or so I have noticed that many investors get very emotional when talking about bull markets, bear markets and stock market rallies simply because they misunderstand what the terms mean. Often this emotion stems from the fact they have made losses or their investment plan has not performed quite the way they would have liked, and sometimes the reason for this is they did not fully appreciate what bull and bear markets actually are.
As regular readers of this blog will know I am a long term bull regarding the global economy. However people often appear to think that this means that I am saying the global economy will recovery from here without any problems and everything will get back to normal.
Actually all I am suggesting is that over the long term (meaning 5+ years) that the global economy will continue to expand just as it has for hundreds of years. There will bumps, bubbles, scandals, disasters as has happened over the entire span of modern human history, but eventually we normally bounce back.
The alternative is that the world has entered a period of long term decline where the demand for just about everything will be reduced. (except food, water and shelter) In theory I guess the global economy could decline to a certain point and move sideways forever but how likely is that?
So then what exactly is a bull market and what does being bullish actually mean? Technically speaking all a bull market means is that the long term stock market trend is upwards. It does not mean the market will head up forever nor does it mean there will not be nasty corrections. It simply means that a stock market low has been reached and that from this low the market will move up.
Pretty simple hey? Well yes, except that there can be different types of bull markets and people who are “bullish” can range from the cautious (that’s me) to the fantastically optimistic. To makes things even a little more confusing there is no international standard that defines a bull market in terms of time so the bull run could be quick and sharp or long and fairly shallow.
This then leads to confusion because some people equate a bull market will a spectacular rally in stock prices and think it is a road to riches. In fact you can go quite broke by investing during a bull market simply by buying shares at high prices and then getting wiped out when the inevitable bear market comes along. If you think about, investing in a bear market although risky, can often turn out much better than ploughing into the market at the top of a bull market run.
Bear markets are basically the opposite of bull markets and in simple terms mean the markets are on a long term trend downwards. But a “bearish” stock market does not mean that stock prices will decline forever and that there will never be another bull market. Some analysts and market commentators may simply be bearish about the stock market over the short to medium term but expect another bull market to come long, whereas others will suggest the bear market will be long and that another bull run will be years away.
The simple undeniable fact is that nobody on planet earth knows exactly how the stock market will perform tomorrow let alone over the next months or years. As with all forecasting, the further out we go in terms of trying to predict what will happen the less likely we are to be right. Sometimes we might get it right, sometimes we will get it right simply because we got lucky, but much of the time we will be wrong. Such is life.
Another investing concept that tends to stir emotions are rallies. Suggesting the stock market may be in a rally during a bear market tends to get a lot of people jumping up an down about something called a “sucker’s rally”.
Frankly I tend to stay away from such debates since the term suckers rally can be applied to everything from a correction after a rally during a bear market (but then the market recovers and heads up again) to a what I would call a true suckers rally; which would mean the market heads all the way back down, breaks through the previous low, and keeps going down to a new low. (quite nasty indeed)
Basically speaking, a rally is a period where the stocks head up over a few days but having said that, it is not a term that has a concrete definition. One thing is for certain though, rallies do not last forever and you should be aware that they do not always indicate the economy is recovering.
As I have stressed a few times in other articles, the stock market tends to rise and fall before other economic indicators. (such as GDP figures, employment numbers etc) Therefore the recovery of the ASX All Ordinaries since the lows of March does not mean the Australian economy is now recovering, it just means investors feel a recovery is coming and most of the damage to company earnings has already been priced into stocks.
So in a nutshell I expect bull markets, bear markets, rallies, routs, business cycles, booms, bubbles and busts to be part of investing. I might invest on the basis that I believe global demand for good and services is on a long term trend upwards, but I am always cautious and appreciate that investing in anything involves an element of risk.
Finally let me leave you with some wise words: (not from me of course)
You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.
– Peter Lynch.