What is bull market cycle?
A bull market is when buyers are willing to pay higher prices as the overall optimism for better future performance of the stocks is high. This happens when businesses are expanding, growing at an above-average rate, face favourable as well as growing demand for their products & services and are able to price them profitably.
Bull markets generally take place when the economy is strengthening or when it is already strong.
The return to equity investors goes up as stock prices appreciate to reflect this optimism. As buyers pay an higher price for a stock, prices may move beyond what can be justified by the underlying intrinsic value.
In a bullish market, the number of shares advancing in price is higher than those that close lower than their earlier prices. As such, there is no specific definition for the bull market cycle but as per the market experts, a bull market is a situation, in which, stock prices rise by 20 per cent, usually after a drop of 20 per cent and before a second 20 per cent decline.
A bull run in the equity markets start off with large-cap stocks and then moves on to mid and small-caps. In bull markets, mid-caps tend to run ahead of large-caps. Overvaluation in bullish markets is a common feature, as prices rise rapidly and hence, is a big risk.
It is observed that during the bull market cycle, there is an increase in the amount of IPO activity as more companies intend to get themselves listed on the stock exchange at premium prices as investor sentiments are too positive and a large number of investors are ready to invest in IPOs.
One of the most memorable bull market cycles that any investor can remember in India was during 2003-2007 when huge liquidity and growth was witnessed. They were four years of 40 per cent compounded earnings growth without inflation and interest rates falling.
The most recent one is the ongoing bull rally. The market crashed in March 2020 led by the fears surrounding the COVID-19 pandemic and the imposition of nationwide lockdown. However, the market started recovering and surpassed the pre-COVID level with BSE Sensex surging approximately 103 per cent from March 2020 and making an all-time high last week.