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What Is a Bull Market? Understanding How It Can Benefit Investors13 min read

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Those who gradually join the world of investments have probably heard somewhat confusing terms that are still difficult to understand. One of them is the “bull market,” which many people talk about when prices start rising. 

What is a bull market? Why are many investors feeling optimistic during this period?  Today I explain it all!  But, before that, make sure that as we enter a recession you look into a 401(k) to gold rollover.

This might be the best move you can make ahead of the market turbulence.

The term “bull market” defines a scenario where the financial market sees prices rise. While it often refers to the stock market, the truth is that it can be related to any traded asset, including real estate, currencies, bonds, commodities, and more.

During bull markets, the stock market usually has extended profits. In other words, these periods can mean continuous stock-related gains over an often long period of time.

In simpler terms, a bull market occurs when a stock market index or an individual security gains 20% or more. Therefore, it’s considered the opposite of recession.

However, since asset prices can go up and down multiple times during trading, a bull market only describes long periods in which prices rise continuously and stay there for months or years.

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Understanding the Basics of Bull Markets

While its actual origin has been the subject of debate for years, the term “bull market” is believed to be linked to how the animal attacks its opponents.

When they go to attack, bulls raise their horns in the air, which can be metaphorically related to the movements of the market when the trend is up and prices skyrocket.

Bull markets usually occur when the economy is strong or has started to get stronger. Therefore, they are also linked to solid gross domestic product (GDP), corporate profits, and low unemployment.

Also, investor confidence tends to increase as they rely on some strategies to profit from the bull markets and are more willing to engage in trading activities to get benefits. This period of time also tends to see a demand for stocks and a positive tone in the financial markets.

Corporate profits and unemployment can be measurable during bull markets. However, other factors can be more difficult to calculate, such as the tone of the market commentary. In addition, the supply and demand of securities also tend to fluctuate during these periods.

Characteristics of a Bull Market

Characteristics of a Bull Market

In summary, these are the characteristics that may indicate that you are in a bull market:

  • Increases in general market indexes over a sustained period: As mentioned, a bull market is defined as a period of two months or more characterized by an increase of 20% or more according to a broad market index, such as the Dow Jones Industrial Average (DIJA) or the S&P 500.

  • High investor confidence: When a bull market occurs, investor confidence increases, as they often resort to strategies that allow them to trust the stock market’s strength and secure future performance. During this period of time, they also tend to buy more shares and hold their investments.

  • Strong National Economy: Bull markets are also frequently linked to other key economic indicators, such as high employment levels and growing gross domestic product (GDP). Overall, the performance is positive on such data.

Other characteristics of a bull market include consumer confidence and a positive tone of market commentary.

Bull Market Example

If you still have doubts about what is a bull market, this example could help you better understand the scenario that the term describes.

At the end of the stagflation era in 1982, the United States saw the most prolific bull market in its modern history.

Since it ended when the dotcoms started to crash in the 2000s, which means it lasted for many more, this period is considered a secular bull market. At that time, the Dow Jones Industrial Average (DIJA) calculated an annual return of 15%.

Additionally, the Nasdaq, the nation’s second-largest automated and electronic stock market, went from 755 to 2,400 during the 1995-2000 period, meaning its value tripled.

However, a prolonged bear market hit the country shortly after the 1982-2000 bull market ended. During 2000-2009, annual returns of 1-16% were estimated, and the market struggled to get established. The 2008 financial market crash caused the S&P 500 and other major indexes to bottom out.

Then another ten-year bull run began. According to analysts, that was the last and longest bull market the US has seen. It was mostly driven by a rally in tech stocks.

How Long Can a Bull Market Last?

Bull markets cannot last forever. Following the business cycle’s trends, the stock market often experiences periods of growth that eventually reach a point of decline.

However, history shows that bull markets tend to last much longer than bear markets despite the fact that both are usually equal in number. As you can see from the example, the longest bull market in modern US history lasted more than ten years.

Therefore, investors often trust that bear markets are only temporary and that their natural volatility will take them to the other extreme at some point.

What Causes Stock Prices to Rise in a Bull Market

Bull markets tend to occur when the economy is robust and starts to grow. Therefore, rising prices in the stock market are common.

Since they are tied to future earnings expectations and companies’ ability to generate cash flows, stock prices rise during bull markets.

A strong manufacturing economy with high employment and growing GDP also tends to suggest that earnings will continue to grow. In addition, low interest rates and corporate tax rates are also often linked to business profitability. Consequently, stock prices skyrocket.

Bear versus Bull Market: A Comprehensive Comparison

Bear versus Bull Market

Whether you’re familiar with economic trends or just making your way into investing world, you’ll constantly hear about bull and bear markets.

Unlike a bull market, a bear market refers to falling stock prices with negative investor sentiment. Once again, an animal metaphor is used to describe this scenario.

A bear market occurs in a similar way that the animal attacks its opponents, as bears usually hit them with their paws down.

Bull and bear markets coincide with the business cycle. While the bull market usually indicates economic expansion, the bear market can suggest that an economic contraction is about to happen.

What Is a Bear Market?

As mentioned, bear markets are soon the opposite of bull markets. Therefore, during this period, a broad market index, such as the S&P 500, typically shows a drop of at least 20%.

Furthermore, bear markets often last for an extended period of two months or more, erasing the gains that investors managed to accumulate during bull markets. Therefore, these trends tend to breed pessimism, see the economy slow down, and come with rising unemployment rates.

However, it is important to keep in mind that bull and bear markets co-exist, and it is impossible for one to exist without the other, as both are an essential part of the economic cycle.

Characteristics of a Bear Market

These are some features that may indicate that you are seeing a bear market:

  • Broad market downturn with stock prices falling 20% ​​or more for an extended period

  • Economic issues or decline, including reduced manufacturing output, slowed or negative GDP growth, low wages, or much higher unemployment rates.

  • Negative investor sentiment, as people are often pessimistic about trends in the stock market and may believe their portfolios are at risk.

  • Investors sell their stocks and hold cash while switching to other investment alternatives such as bonds, precious metals, money market funds, or real estate.

  • Short duration compared to bull markets, as bear markets typically last only 10 months on average.

Why a Bull Market Can Fall and Become a Bear Market

Bear markets and bull markets usually come one after the other. When bull markets fail, they tend to turn into bear markets. It happens because sustaining the rise in stock prices is very difficult if the economy hits a rough patch, unemployment rises, or a recession hits the national finances.

Also, when the economy is threatened by any of these factors, investor sentiment turns negative. In periods of uncertainty, market psychology shows a high concern for loss, meaning people try to reduce risk. Consequently, markets can enter downtrends.

How to Invest in a Bull Market

Before investing in a bull market, you must understand that stock markets are volatile. In other words, you will not be able to make profits as if you were buying fixed-income securities. Therefore, you must set your mindset for the long term.

History shows that stock markets have long-term bullish trends. In fact, if you look at the reports issued in the last decade, you can see that its annual return stood at 12.3% from 1926 to 2021.

Therefore, if you really want to invest in a bull market, you should not just try to get caught in an uptrend but design a smart investment strategy without trying to time the market.

Determining whether a bull market is going to happen is difficult for all types of investors, even for experts. Also, thinking about this can cause you to make rash decisions. Many people sell assets to avoid losses when they believe a bear market may occur, but that attempt to save cash usually ends up being worse.

That’s why experts suggest dollar cost averaging to reduce the risk of loss since this practice allows you to invest a fixed amount in one security or different securities at set intervals. In other words, if you rely on this strategy, you would be buying more shares when their price is lower and fewer shares when the price starts rising.  

Tips to Invest in a Bull Market

During a bull market, it is common to see people investing more and more. However, while this practice can be profitable, you must keep in mind that every move has risks.

Have you already made the decision to take action in a bull market to try to increase your profits? If so, here are some tips you can follow:

Think Long Term

Avoid making decisions driven by trends. If you want to invest in the bull market and reduce the associated risks a little, stick to your investment plan and make sure each move helps you get closer to your long-term goals.

Moreover, being in a bear market in 2022 doesn’t mean you’ll see a bull market where you can make a lot of money in 2023. Therefore, you should be careful!

Keep Your Portfolio Diversified

One of the best tips you can follow if you plan to invest in a bull market is to diversify your portfolio. Investing in different asset classes could provide you with a lifeline when there’s a bear market or stock prices start to drop significantly.

Also Read:  Bonds vs. Dividend Stocks Investing Tips

Adjust Your Asset Allocation as You Approach Retirement

Timing the market to determine when there might be a bull market that could boost your profits is not a good idea. However, you can adjust your asset allocation as you get closer to your golden years.

In other words, try to make your portfolio fit what you can benefit from depending on your age and as you get closer to retirement.

Investing most of your money in stocks with aggressive strategies is a great idea when you are young. However, having a more conservative portfolio with a higher investment in fixed-income securities could be ideal for you when you are 10 to 15 years from retirement.

Seek Help from a Financial Advisor

Are you new to investing in the bull market and still have many questions? If so, seeking help from a professional financial advisor is the best way to go.

A reliable, experienced financial advisor can help you make a better decision if you’re not sure your investment mix is right. Experts can also help you if you need help determining the best way to allocate assets for your age.

Also, if a financial advisor reviews your portfolio, you can know if your investments can benefit you and develop a smart plan to take advantage of a bull market and achieve your financial goals.

How to Take Advantage of a Bull Market: Best Strategies to Consider

Many investors take advantage of the moment when stock prices rise and buy assets they can sell when their value peaks during the bull market.

While it is difficult to determine the bottom point or when prices will go as high as they can, some strategies can keep losses to a minimum.

During bull markets, these are the strategies that more experienced investors tend to rely on:

Buy and Hold a Security

It refers to the process of buying a security and holding it to sell it at a later date, hoping that the bull market will bring an increase in prices.

Buying and holding securities is one of the most basic strategies in investing. However, like the others, it also involves a certain degree of risk.

If you think this strategy could be a good option during a bull market, you should be confident in the trend and hold the asset until the value rises.

Increased “Buy and Hold” Approach

This approach is a variation of the previous strategy and involves buying and holding assets with ongoing investments as the price rises.

In other words, following the increased buy-and-hold approach during a bull market means that you should increase your holdings in a particular security if prices soar. You must buy an additional fixed number of shares for each price rise.

This method has helped many investors make money. However, you must remember that it can also carry risks.

Retracement Additions

Even during a bull market, stock prices do not remain unchangeable. You can likely see short periods with small drops even though the general trend continues to rise.

Some investors watch for these changes and buy stocks when prices move lower, hoping that the bull market will continue to drive their value higher and can provide a discounted retroactive purchase price.

Full Swing Trading

This strategy is considered the most aggressive way of trying to leverage a bull market and price increases.

With full-swing trading, investors use short selling and other techniques to maximize profits as uptrends become broader.

Final Thoughts

Investing in a bull market can be very profitable for many investors. However, you must keep in mind that the stock market is volatile by nature, which means that you will face risks even if you enter the game when in an upward trend.

Also, good past performance does not guarantee that you will have excellent future results. A bull market usually comes with a strong economy and a low unemployment rate but you have to be smart and careful if you want to make more money.

Do you need help to make a better decision? Remember that a financial advisor can review your portfolio and be your best ally when creating an investment plan that favors your future goals!

About 

Edwin Cannon has spent his entire career in the financial industry and specializes in alternative investments and surviving marketing turbulence. He started My Retirement Paycheck to help educate consumers about retirement investment options that aren't typically introduced by advisors.