What is a bull market?
A bull market is the condition of a financial market in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market, but can be applied to anything traded, such as bonds, real estate, currencies, and commodities.
Since security prices essentially rise and fall continuously during trading, the term “bull market” is generally reserved for extended periods in which a large portion of security prices are rising. Bull markets tend to last for months or even years.
Key points to remember
- A bull market is a period of time in financial markets when the price of an asset or security is continuously rising.
- The commonly accepted definition of a bull market is when the stock price increases by 20% after two declines of 20% each.
- Traders employ a variety of strategies, such as increasing buy and hold and retracement, to take advantage of bull markets.
Understanding Bull Markets
Bull markets are characterized by optimism, investor confidence, and expectations that strong results will continue for an extended period. It is difficult to consistently predict when market trends might change. Part of the difficulty is that psychological effects and speculation can sometimes play a big role in the markets.
There is no specific, universal metric used to identify a bull market. Nonetheless, perhaps the most common definition of a bull market is a situation in which stock prices rise 20% or more from recent lows.
Since bull markets are difficult to predict, analysts usually cannot recognize this phenomenon until after it has occurred. A notable bull market in recent history was the period between 2003 and 2007. During this time, the S&P 500 rose by a significant margin after a previous decline; when the 2008 financial crisis took effect, significant declines again occurred after the bull run.
Characteristics of a bull market
Bull markets usually take place when the economy is getting stronger or when it is already strong. They tend to occur alongside high gross domestic product (GDP) and falling unemployment and often coincide with rising corporate profits. Investor confidence will also tend to rise throughout a bull market period. Overall demand for stocks will be positive, as will the general tone of the market. Also, there will be a general increase in the amount of IPO activity during bull markets.
Notably, some of the above factors are more easily quantifiable than others. While corporate profits and unemployment are quantifiable, it can be more difficult to gauge the general tone of market commentary, for example. The supply and demand for securities will switch: the supply will be weak while the demand will be strong. Investors will be eager to buy securities, while few will be willing to sell. In a bull market, investors are more willing to participate in the (stock) market in order to make a profit.
Bull markets versus bear markets
The opposite of a bull market is a bear market, characterized by falling prices and usually surrounded by pessimism. Commonly held belief about the origin of these terms suggests that the use of “bullish” and “bearish” to describe markets stems from the way animals attack their opponents. A bull raises its horns in the air, while a bear slides its paws down. These actions are metaphors for the movement of a market. If the trend is up, it is a bull market. If the trend is down, it is a bear market.
Bull and bear markets often coincide with the business cycle, which consists of four phases: expansion, peak, contraction, and trough. The appearance of a bull market is often a leading indicator of economic expansion. Since public opinion about future economic conditions determines stock prices, the market frequently rises even before broader economic measures, such as gross domestic product (GDP) growth, begin to pick up. Likewise, bear markets usually set in before economic contraction sets in. A look back at a typical US recession reveals a stock market down several months before the drop in GDP.
Market Mindsets: Bulls Vs. Bears
How to take advantage of a bull market
Investors who want to take advantage of a bull market should buy early in order to take advantage of rising prices and sell them when they have peaked. Although it is difficult to determine when the trough and peak will occur, most losses will be small and usually temporary. Below, we’ll explore several important strategies that investors use during bull market periods. However, since it is difficult to assess the state of the market as it currently exists, these strategies also carry at least some degree of risk.
buy and keep
One of the most basic strategies in investing is to buy a particular security and hold it, possibly to sell it later. This strategy necessarily involves investor confidence: why keep a security if you don’t expect its price to rise? For this reason, the optimism that accompanies bull markets helps fuel the buy and hold approach.
Increased purchase and retention
Increasing buy-and-hold is a variation of the simple buy-and-hold strategy, and it involves additional risk. The premise behind the increased buy-and-hold approach is that an investor will continue to increase their holdings in a particular security as long as its price continues to rise. A common method for increasing holdings suggests that an investor will buy an additional fixed amount of shares for each increase in the share price by a predefined amount.
Retracement additions
A retracement is a brief period during which the general price trend of a security is reversed. Even during a bull market, the stock price is unlikely to just go up. On the contrary, there are likely to be shorter periods in which small dips will also occur, even if the general trend continues upwards.
Some investors watch retracements in a bull market and decide to buy during these periods. The idea behind this strategy is that, assuming the bull market continues, the price of the security in question will rise rapidly, retroactively offering the investor a discounted purchase price.
Trade at full speed
Perhaps the most aggressive way to attempt to capitalize on a bull market is the process known as full throttle trading. Investors using this strategy will take a very active role, using short selling and other techniques to try to extract maximum gains as changes occur in the context of a larger bull market.
Example of a bull market
The most prolific bull market in modern American history began at the end of the stagflation era in 1982 and ended in the dotcom crash of 2000. During this centuries-old bull market – a a term that denotes a multi-year bull market – the Dow Jones Industrial Average (DJIA) has recorded average annual returns of 15%. The NASDAQ, a technology-heavy stock exchange, more than tripled in value between 1995 and 2000, from 755 to over 2,400. An extended bear market followed the bull market of 1982-2000.
From 2000 to 2009, the market struggled to establish itself and produced average annual returns of 1.16%. However, 2009 saw the start of a decade-plus bull market. Analysts believe that the last bull market started on March 9, 2009 and was mainly led by a rally in technology stocks.
Why is it called a “bull” market when prices are going up?
The actual origin of the term “bull” is subject to debate. Some believe that the terms “bearish” (for bearish markets) and “bullish” (for bullish markets) derive from the way each animal attacks its opponents. That is, a bull will raise its horns in the air, while a bear will slide down. These actions were then metaphorically linked to the movement of a market. If the trend was up, it was considered a bull market. If the trend was down, it was a bear market.
Others evoke Shakespeare’s plays, which refer to battles involving bulls and bears. In “Macbeth”, the hapless titular character says his enemies tied him to a stake but “like a bear I must fight the cape”. In “Much Ado About Nothing”, the bull is a wild but noble beast. Several other explanations also exist.
Are we in a bull market from 2022?
Generally speaking, a bull market exists if the market has risen 20% or more above its short-term lows. Since the market sold off during the financial crisis of 2008-2009, the stock market has shown a resilient bull market, rising significantly and reaching new all-time highs more than a decade after that stock market crash (despite some sharp setbacks along the way).
What drives stock prices higher in a bull market?
Bull markets often coexist with a strong, robust and growing economy. Stock prices are informed by future earnings expectations and the ability of companies to generate cash flow. A strong manufacturing economy, high employment and rising GDP suggest earnings will continue to grow, which is reflected in rising stock prices. Low interest rates and low corporate tax rates are also positive for business profitability.
Why do bull markets sometimes falter and become bear markets?
When the economy is going through a difficult period, for example in the face of a recession or soaring unemployment, it becomes difficult to sustain the rise in stock prices. Moreover, recessions are often accompanied by negative changes in investor and consumer sentiment, with market psychology being more concerned with fear or risk reduction than with greed or risk taking.
