- A bull market is an extended period when prices for stocks or other assets are steadily on the rise.
- Bull markets are usually accompanied by high investor confidence and a strong overall economy.
- Though trying to time a bull market is tempting, most investors should stick to their long-term strategy and goals.
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If you’re at all interested in the world of investing, you’ll notice the phrase “bull market” comes up a lot in common parlance. “The bulls were out today,” says some strategist on TV or Twitter, and once again you wish you knew exactly what they meant.
Let’s break down just what bull markets are, and what they mean for both institutional and individual investors.
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.
Key traits of a bull market
Though the two don’t always move in strict tandem, bull markets often reflect an “up” period in the general economy — specifically, the expansion phase of a business cycle.
The main characteristics of a bull market include:
- Investors buy more stock: Their prices have been going up, and investors are convinced they’ll keep doing so, so they keep buying. This raises prices even higher, due to supply and demand.
- Companies bet more on their future: Buoyed by consumer buying, businesses make more investments, which usually means hiring more workers and paying existing employees more money.
- Unemployment rates go down: And average wages go up, as companies compete for workers. Workers are also more likely to look for a job since they have a better chance of finding one paying them more.
- Money is easier to spend: After all, it feels like it will be relatively easy to get more.
- And that means risking excessive inflation: All that money being spent can lead to prices going up too much.
How long do bull markets last?
Generally speaking, a bull market is considered over when stocks start a period of steady decline, falling at least 20% from their peak. But it’s important to remember no two bull markets are the same.
As the old saying goes, bull markets don’t die of old age. They die when the market has changed fundamentally, when prices have risen too high or too fast, or when some other event forces investors to feel pessimistic about the future.
Because it’s impossible from day to day to tell when a market has reached its top, it’s very difficult to foresee the end before you are in it. The length of any given bull market is informed by the factors of its time — a concept made clear if you take a moment to examine at some of the biggest bull markets in history:
Post-World War II Rally: June 1949 to August 1956
In these prime post-war years, the S&P 500 rose 267% over 86 months, which works out to a commendable annualized return of 20%. On the home front, consumer goods to fuel the Baby Boom were the main driver, while a strong export market also helped companies grow. This bull stopped primarily because the Fed raised interest rates, and international tension helped bring on a bear market. However, the market was back in bull territory by 1957.
The Housing Boom: October 2002 to October 2007
The Housing Bubble — a dramatic growth in the real estate sector — began after the federal government deeply cut interest rates in hopes of encouraging investment. The financial institutions that encouraged home financing, real estate investing, and trading in mortgages did extremely well — until interest rates started to climb again, and bad borrowers started to default, leading to the subprime mortgage crisis. Stocks hit their peak in early October 2007, marking the end of the bull market and the start of a recession. A bear market arrived the following summer.
The Longest Bull Run in History: March 2009 to March 2020
This record-breaking bull market lasted 131.4 months (nearly 11 years), making it the longest in history. After taking a beating during the Great Recession (2007-09), the S&P 500 gained over 400% after a low of 666 points on March 6, 2009. On February 12, 2020, the Dow Jones Industrial Average reached a record high of 29,551 points. The gains for the S&P alone amounted to over $18 trillion on paper, and during the period unemployment was at a 40-year low, at under 4%.
But just a month later, on March 11, the Dow lost over 20% of its value, falling to under 19,000. The S&P 500 and the Nasdaq were pounded soon after. The most obvious cause? Widespread fears over economic and social damage brought by the global spread of the new coronavirus, as businesses shuttered and millions of people were thrown out of work.
The current financial landscape
Buoyed by government spending and optimism about the economy and its long-term prospects, indexes quickly began a recovery after bottoming out in the last half of March 2020. After just a few months, the S+P 500, Dow, and Nasdaq had all regained the value they lost, putting the market well into bull territory. By late August, the S+P 500 and the Nasdaq were up 58% and 75% from their March 23 lows.
But all that gravy hasn’t been spread evenly: The main gainers have been Amazon, Netflix, Salesforce, Microsoft, Alphabet, and other monster tech companies that profited from our newly sedentary and homebound lifestyle. Many other companies, especially some in the retail and hospitality/travel sectors, have been more or less treading water, or going bankrupt.
According to Christian Mueller-Glissmann, a portfolio strategist at Goldman Sachs, the current high stock prices may act as a “speed limit” in the future, meaning that investors will soon have to access whether those levels are merited by future performance: “This is what always happens after a bear market. You get an initial very sharp recovery, and then you get a period where the market actually sees what type of earnings growth you’re really getting.
“We feel that after this initial explosive recovery in growth, there might be a bit of disappointment for what you get in fundamentals.”
Tips on investing in a bull market
Wondering how prudent investors act in a bull market? Here are some tips:
Don’t try to time the market.
It’s almost impossible to tell when the market is at its peak, and even professionals rarely manage to call it right. You might not only end up selling too late — but you might also end up selling way too early, missing out on future profits. Better to enter and leave the market gradually, without drama — or according to your own preset benchmarks — rather than selling all at once because you’re convinced it’s reached its top. If you follow a buying strategy like dollar-cost averaging, stick to it.
It can be tempting to go all in a hot stock or sector when the market has been growing, but the end may be closer than you think. If you’ve only bought the biggest so-called winners, you may find that their pumped-up prices evaporate the most quickly. A super-strong bull market can make even weak companies appear like sure things — until they aren’t. Be sure you know what it means to diversify effectively, and keep in mind that reacting to news about individual stocks or companies isn’t the best way to figure out where to invest.
Pay attention to the all-mighty consumer.
Companies that sell products directly to consumers (as opposed to industrials) have proven themselves over decades. Bull markets in recent years have tended to be powered by such companies, but more importantly, they may be a decent safe harbor during downturns as well. Consider investing in these equities, or in a large-cap mutual fund with such stalwarts.
The financial takeaway
It’s impossible to predict exactly when a bull market will end. But it always does, after an external force affects investors’ feelings about the future and stock prices start to look too pricey.
Despite the inevitable dips, over an extended time horizon, the stock market has never failed to rise. So not being invested in the market means missing out over the long haul. Like a savvy matador, individual investors should keep an eye on the bull’s moves, and adjust accordingly — but always stay in control of their overall strategy and goals.