A bull market usually refers to the stock market as measured by three indexes: the S&P 500, the Nasdaq and the Dow Jones Industrial Average. However, the term can refer to any market from individual stocks to real estate, bonds and currencies.
The opposite of a bull market is a “bear market,” which occurs when prices fall 20 per cent below their most recent peak.
Bull markets and bear markets can both last for years, research suggests the average is about 3.8 years.
One of the most prolific bull markets in recent United States history started in 1982 and continued until the dotcom bust in 2000. That period was followed by a long bear market when the market struggled from 2000 to 2009. That set the stage for the start of a decade-long bull market run in 2009.
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Why is it called a bull market?
The origin of “bull market” is uncertain, but the term was likely coined because bulls are associated with aggression and known for charging at great speed – the perfect analogy for a surging market. Bears, on the other hand, are associated with hibernating, which draws to mind a sluggish or slow-moving market. You could also picture a bear dragging the market down with its claws.
How does a bull market work?
A bull market usually lasts until prices have increased for so long, that investors believe they will continue to rise. The perceptions investors have about the value of stocks influences prices, like a self-fulfilling prophecy.
Investors begin inflating prices beyond the asset’s value, leading to investments being wildly overvalued. This can lead to what is known as an investment “bubble” where prices rise until the supply of assets can’t sustain it. Investors panic and sell their shares, the bubble bursts and prices begin to fall. If prices fall by 10 per cent or less, it’s considered a market correction. If prices fall by more than 20 per cent, it signals the beginning of a bear market.
What triggers a bull market?
Several factors that can contribute to a bull market, including fiscal and monetary stimulus such as the government bailout plans offered during the COVID-19 pandemic. Growth in corporate earnings also plays a role. When publicly traded companies release quarterly numbers that meet or exceed expectations, the company is rewarded for those results. Bull markets are often accompanied by rising gross domestic product growth and falling unemployment rates.
Bull markets and bear markets often coincide with the economic cycle. There are four phases to the cycle: expansion, peak, contraction and trough. The start of a bull market generally points to economic expansion, while a bear usually starts before an economic contraction. Public sentiment influences stock prices so the market often rises before other indicators like GDP growth are evident. If we look back in history, recessions in the United States are often preceded by a stock market fall months ahead of any GDP drop.
Three tips for investing in a bull market
- Don’t try to time the market
Even experts have a hard time determining when the market is at its peak. If you sell everything at once because you think the market has peaked, you could end up being too early or too late. Your best bet is to enter and exit the market gradually or use your own pre-set benchmarks. If you follow a strategy like dollar-cost averaging, stick to it.
- Diversify your investments
Investing in the hottest sector or stock when the market is rising is tempting, but the end may come sooner than you think. A strong bull market can make even the riskiest companies seem like safe bets. If you only buy the most popular options, you could see their price increases disappear the fastest. Make sure you understand how to diversify effectively and avoid reactionary responses to news about specific companies or stocks. Also keep in mind that different stocks may do well at different points in the bull market. Early in an economic expansion you’re likely to see cyclical sectors do well like financials and industrials. Tech stocks and commodity sectors tend to lead in the later stages of the expansion.
- Pay attention to the almighty consumer
Companies that sell their products directly to consumers (as opposed to the industrial sector) have thrived for decades and often power bull markets. They can also be a safe haven during downturns. Consider investing in these stocks or a large-cap mutual fund that includes them.
Conclusion
Ultimately, no one knows when the transition from a bull market to a bear market is most likely to occur. Market shifts can be gradual over time and exact dates can only be determined after retrospective analysis.
