What is a bull market?
A bull market, also known as a bull run, is a long, extended period in the market when stock prices are on the rise. There is no single stat or metric that defines when we are in a bull market, but one common rule of thumb is stock prices increasing at least 20% from its most recent low, with signs that they will continue to grow. The term is most often applied to the stock market, as measured by the major indexes: the S&P 500, the tech-heavy Nasdaq, and the Dow Jones Industrial Average. But a bull market can also occur in anything that can be bought or sold, from individual stocks to other assets such as real estate, bonds, and currencies.
A bull market is the opposite of a bear market, which happens when stock prices are falling. The nomenclature makes it easy to remember the difference: When aroused, bulls charge. They’re known for running at great speed, and so they became a symbol for a surging stock market. In contrast, surly, defensive bears are associated with hibernating — hence, the perfect metaphor for a declining or sluggish stock market.
In the investing world, the terms “bull” and “bear” are frequently used to refer to market conditions. These terms describe how stock markets are doing in general—that is, whether they are appreciating or depreciating in value. And as an investor, the direction of the market is a major force that has a huge impact on your portfolio. So, it’s important to understand how each of these market conditions may impact your investments.
KEY TAKEAWAYS
- A bull market is a market that is on the rise and where the economy is sound; while a bear market exists in an economy that is receding, where most stocks are declining in value.
- Although some investors can be “bearish,” the majority of investors are typically “bullish.” The stock market, as a whole, has tended to post positive returns over long time horizons.
- A bear market can be more dangerous to invest in, as many equities lose value and prices become volatile.
- Since it is hard to time a market bottom, investors may withdraw their money from a bear market and sit on cash until the trend reverses, further sending prices lower.
1. Characteristics of a Bull Market
A few characteristics tend to foretell and accompany bull markets.
- High investor confidence: When investors feel bullish about market trends, they choose to make bolder investment decisions, pumping money into the market and helping it grow.
- Business profitability: Stock markets reflect the perceived business climate. When a business improves its bottom line, investors buy stock in that business. When a previously private business issues an initial public offering (IPO), investors will similarly choose to invest if they believe the business has charted a profitable course—all of which can grow a bull market. However, some businesses can be overvalued on paper, which can lead to market corrections or even bear markets. For example, overvaluation of various tech stocks caused the dot-com bubble of the early 2000s.
- Specific interest rates: When a central bank like the United States Federal Reserve lowers interest rates, stocks become a desirable investment and a bull market can ensue. When central banks raise interest rates, bonds can enter a bull market because they will pay a higher return on investment.
- Overall stability: Market indexes thrive when businesses are stable and predictable. Generally, when interest rates remain steady or when inflation keeps a reliable pace, stock brokerages oversee sustained buying. Following market crashes in the late 1920s and early 1930s, the federal government created various institutions like the Federal Deposit Insurance Corporation (FDIC) to help promote confidence and stability. This stability would help kickstart a sustained bull market following World War II.
2. How to invest in a bull market
Regardless of what the market is doing, you should maintain a long-term focus to cultivate long-term wealth. While it can be a smart idea to invest when stocks are cheap, it’s unwise to try to time the market. Great long-term businesses can be found in any market.
One smart thing to do is learn the principle of dollar-cost averaging. This involves investing equal dollar amounts at specific time intervals, which can help you invest during a bull market while allowing your portfolio to benefit from corrections and crashes as well.
3. Example of bull market
The world encountered its longest bull market from March 2009 to March 2020, sustained for 11 years. It was the most impressive bullish move in the history that survived the European Sovereign debt crisis, civil wars in Iraq and Libya, the US-China trade war, and Brexit. However, the Coronavirus pandemic led to its downfall.
During this favorable market period, stocks like Dow Jones Industrial Average and S&P 500 performed stunningly. An important factor for its sustenance is believed to be the Fed funds target interest rate which was kept close to zero in the US.
Other historical examples include the housing bubble between October 2002 and October 2007 in the US that had induced 102% gains, post World War II gains, and dot-com bubble rallies.
4. How Bull Markets Compare to Bear Markets
When prices fall over a period of time, that’s a bear market. Think of a bear swiping downward with its claws, knocking the market down.
5. Types of Bull Markets
There are several specific types of bull markets to be familiar with.
Stock
Typically all three major stock market indexes rise at the same time. These include the Dow Jones Industrial Average, the S&P 500, and the NASDAQ. A bull market consistently makes higher highs and higher lows. A stock bull market occurs in a healthy economy.
Gold
On September 5, 2011, gold prices reached a new high of $1,895. This signified the end of a bull market in gold that started in 2000. Before that time, gold usually hovered around $300–$400 an ounce.
Bonds
Bonds have been bullish since the mid-1980s. What this means is that investors have not lost money when buying a bond because their rates of return were always positive. The indexes tracked by the St. Louis Federal Reserve all show positive returns for this period. Some may have come close to zero returns, but none crossed the line.
Secular
A secular bull market is a long-term, overarching trend that lasts five to 25 years. A bull market can experience a market correction, drop 10%, and then resume its upward swing without entering a bear market. A secular bull market can have smaller bear markets within it. These are called primary market trends and happen frequently.
