What does a bull market entail, and in what ways can investors capitalize on it?

What Is a Bull Market?

A bull market signifies a financial market phase in which prices are ascending or anticipated to rise. Though commonly associated with the stock market, the term “bull market” encompasses any traded asset like bonds, real estate, currencies, and commodities.

The term ‘bull market’ typically denotes prolonged periods when a substantial portion of security prices is on an upward trajectory, as security prices fluctuate continuously during trading. Bull markets can endure for months or even years.

Key Takeaways

• A bull market refers to a period marked by continuous price increases in financial markets.
• The widely accepted definition of a bull market is when stock prices surge by 20%.
• Traders utilize diverse strategies like increased buy and hold and retracement to capitalize on bull markets.
• The antithesis of a bull market is a bear market, characterized by descending prices.

Investopedia / Xiaojie Liu

Understanding Bull Markets

Bull markets embody positivity, investor confidence, and an expectation of sustained strong performance over an extended period. Predicting market trend shifts is challenging, partly due to psychological influences and speculation’s impact on market behavior.

While there isn’t a universal metric for defining a bull market, the most prevalent yardstick is a scenario where stock prices surge by 20% or more from recent lows.

Identifying bull markets before they occur is challenging; usually, analysts can only confirm their presence after the fact. A notable recent bull market spanned from 2003 to 2007, witnessing significant S&P 500 growth post a prior decline, followed by declines during the ensuing 2008 financial crisis.

What Causes Bull Markets

Bull markets typically emerge during or on the back of a strengthening economy. They are associated with robust gross domestic product (GDP) and declining unemployment rates, often synchronized with rising corporate profits. Investor confidence escalates during bull markets, reflected in positive stock demand and market sentiment. IPO activity also tends to surge during such periods.

While some factors like unemployment and corporate profits are quantifiable, market sentiment can be harder to gauge. Supply-demand dynamics shift towards weak supply and robust demand in bull markets. Investors eagerly buy securities with fewer willing to sell, aiming to profit amidst the market upswing.

Characteristics of Bull Markets

Bull markets exhibit distinct characteristics including increased trading volume as more investors hold onto securities anticipating capital gains. Securities in bull markets garner higher valuations as investors are willing to pay more due to perceived potential for price appreciation.

Bull markets also feature enhanced market liquidity with high demand and limited sellers, facilitating swift transactions at reasonable prices. Well-performing companies may boost shareholder dividends during bull markets, attracting income-focused investors. The period may witness a surge in companies going public through IPOs, offering investors entry into promising new ventures.

Bull vs. Bear Markets

A contrary scenario to a bull market is a bear market, characterized by price declines and prevalent pessimism. The popular belief is that these terms – ‘bull’ and ‘bear’ – stem from the attacking styles of these animals, metaphorically referring to market movements. An upswing implies a bull market while a downtrend indicates a bear market.

Bull and bear markets often align with the economic cycle’s phases: expansion, peak, contraction, and trough. The onset of a bull market frequently precedes economic expansion, with stock prices surging ahead of broader economic metrics like GDP growth. Conversely, bear markets often precede economic contractions. History reveals stock market declines preceding GDP downturns during recessions.

Market Mentalities: Bulls Vs. Bears

How to Take Advantage of a Bull Market

Investors aiming to benefit from a bull market should consider early purchases to capitalize on price upticks and sell at the peak. Though timing bottoms and peaks is challenging, losses are usually minimal and transitory. Several strategies are prevalent during bull markets, each carrying a level of risk given the market’s unpredictable nature.

Buy and Hold

An elemental investment strategy involves buying a security to hold for potential future sales, hinging on the investor’s positive outlook for price escalation. The buy-and-hold strategy benefits from the optimism characterizing bull markets.

Increased Buy and Hold

An advanced version involves adding more shares to holdings as the security’s price climbs, introducing additional risk. Investors might acquire fixed share amounts at specified price increments, expecting continuous price hikes.

Retracement Additions

Retracement refers to transient price reversals amidst the overall uptrend. Investors may seize on these dips during bull markets to buy, anticipating quick price rebounds, allowing them to acquire at discounted rates given the overall bullish trend.

Full Swing Trading

The aggressive approach involves active trading to maximize gains amid shifts within a broader bull market. Full swing traders leverage techniques like short selling to optimize returns within the market’s fluctuations.

Examples of Historic Bull Markets

History boasts several significant bull markets, each with unique attributes and catalysts. Notable examples include:

• The Roaring Twenties: Marked by speculation, rapid economic growth, and increased consumer spending until the 1929 stock market crash.
• The Japanese Bull Market of the 1980s: Widespread economic growth and rising asset prices culminated in the 1990s asset bubble burst.
• The Reagan Bull Market of the 1980s: Fueled by Reagan administration policies and technology sector performance from 1982 to 1987, encountering the Black Monday crash.
• The 1990s Bull Market: Linked to internet and technology sector expansion until the dot-com bubble burst in the early 2000s.
• The 2009 Bull Market: Extended from March 2009 to February 2020, marked by earnings growth, low interest rates, and a doubling of the S&P 500 index.

These instances offer a glimpse of prominent bull markets with diverse dynamics and impacts.

From March 2009 to February 2020, the S&P 500 witnessed its lengthiest bull market, surging over 300%. This period featured strong earnings, low interest rates, and investor confidence. Despite its robust run, the market endured fluctuations and corrections, with the technology sector outperforming.

Why Is It Called a ‘Bull’ Market When Prices Go Up?

The term’s origin is debated. ‘Bull’ and ‘bear’ for up and down market trends may have derived from the attacking styles of these animals, metaphorically portraying market movements. Shakespearean references have also been proposed, with various other theories in circulation.

Are We in a Bull Market As of 2023?

The S&P 500 entered a bull market on June 8, 2023, following a 20% rise from October 2022 lows. The Dow Jones Industrial Average and Nasdaq held bull market status since November 30 and May 8, respectively.

What Makes Stock Prices Rise in a Bull Market?

Bull markets usually align with a robust and burgeoning economy. Stock prices reflect future profit expectations and firms’ cash flow prospects. A flourishing production economy, low unemployment, and rising GDP indicate continuous profit growth, mirrored in ascending stock prices. Favorable conditions like low interest rates and corporate tax rates bolster corporate profitability.

Why Do Bull Markets Sometimes Falter and Become Bear Markets?

Economic hardships, such as recessions or spikes in unemployment, can stymie rising stock prices. During downturns, sentiment shifts towards risk aversion, with fear dominating investor and consumer stance instead of optimism or risk appetite.

The Bottom Line

Bull markets denote rising prices and investor optimism in financial markets. While commonly associated with the stock market, bull markets extend to bond, real estate, currency, and commodity markets. They persist for extended periods marked by escalating demand for securities, profit and GDP growth, and shrinking unemployment rates. Bear markets, characterized by descending prices and pessimism, serve as the counterpart to bull markets. The ‘bull’ and ‘bear’ terms likely originated from these animals’ attacking styles in metaphorically representing market movements.