Another popular explanation is that rising markets were once fueled by fast-talking brokers with exaggerated claims about stocks (thus the phrase, “a line of bull”). Paré says that valuation metrics such as PE ratio and dividend yield can give investors clues about where they are in the bull-bear cycle. While not everyone is ready to say we’re in a bull market now, financial advisers broadly agree about how to invest during one. As wishy-washy as that conclusion might seem, it’s crucial to understanding the ambiguity that can come with trying to read investor sentiment during a time of shifting economic expectations. A bull market is often defined as a period during which a major market index has risen by 20% from a recent low.
A period of rising prices and optimism
Bull markets may also emerge when a country is recovering from economic downturn, such as the bull market that followed the 2008 financial crisis. Bull markets are tough to predict, and analysts usually only recognize them after they have happened. As a result, it tends to be difficult to be a trader around bull markets, and instead it makes sense for investors to think and invest longer term rather than try to trade in and out. A bull market often signals the end of a bear market, a period of declining prices, though the turn to a bull market can only be judged in retrospect, when the shift is clear. The market may meander sideways for a long time before it ultimately decides to move higher and become a bull market.
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Bull markets are characterized by optimism, investor confidence, and expectations that strong results should continue for an extended period of time. Smith began her journalism career as a writer and columnist for USA Today. Smith is a graduate of St. John’s College in Annapolis, Md., the third-oldest college in America. Let’s break down what bull markets are, how they differ from bear markets, and what they mean for institutional and individual investors. If businesses improve their profitability, it shows potential and encourages investors to buy their stocks, lured by a high return on investment. Usually, in a bull phase, several private companies choose to issue an initial public offering (IPO), driven by healthy economic conditions and high investor confidence.
Why do bull markets happen?
For more help navigating a bull market, consider speaking with an investment professional. Bull markets stand in contrast to bear markets, which represent a decrease of at least 20% from recent market highs. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional. Every investor has unique circumstances, and they can benefit greatly from evaluating their risk tolerance, goals, and investment horizon before making any specific moves. This record-breaking bull market lasted 131.4 months (nearly 11 years), making it the longest in history. During the last crypto bull run in 2020, prices of Bitcoin reached $20,000 before plummeting.
Post-war boom – 1949 to 1956 (86 months)
It is difficult to predict consistently when trends in the market might change. Part of the difficulty is due to the large roles that psychological effects and speculation can sometimes play in investing. For the past seven years, Kat has been helping people make the best financial decisions for their unique situations, whether they’re looking for the right insurance policies or trying to pay down debt. Kat has expertise in insurance and student loans, and she holds certifications in student loan and financial education counseling. Profit and prosper with the best of Kiplinger’s advice on investing, taxes, retirement, personal finance and much more. In 2023, the Magnificent 7 stocks logged an impressive average return of 111%, compared to a 24% return for the broader S&P 500.
Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
Furthermore, top-line growth should usually increase in line with the GDP and is, therefore, a good measure to reflect demand. Conversely, business top-line growth shows the investment potential for investors. This term is thought to have come from the idea that bulls thrust with their horns upward, whereas bears swipe their claws downward. A bullish or bearish behavior – these metaphors indicate price fluctuation in the market.
- Low interest rates and low corporate tax rates also are positive for corporate profitability and stock prices.
- This strategy necessarily involves confidence on the part of the investor.
- During the last crypto bull run in 2020, prices of Bitcoin reached $20,000 before plummeting.
- No, we’re not in a bull market just because the pundits on TV say we are.
- Remember that a diversified portfolio will probably own all or most of these stocks, but the proportions will likely change over time.
With companies expanding, they hire more employees, decreasing unemployment. Workers are also more likely to look for a job since they have a better chance of finding one that pays them more than their current job. As asset values follow a steady, upward trend, market participants feel optimistic they will keep appreciating. In other words, investors grow more confident, which causes them to buy more, therefore fueling additional gains. As a comparison, in a recession, money usage by banks is curbed, and interest rates of loans go up, limiting investments and leading to a bear market. But businesses may be overvalued on paper after the IPOs, leading to market corrections or even a bear market.
A bear market is characterized by falling prices and investor pessimism. Investors who want to benefit from a bull market should buy early to take advantage of rising prices and sell them when they’ve reached their peak. Of course, it is hard to determine when the bottom and peak will take place. But most losses that result from missing the bottom or top will be minimal and usually temporary, as they’re erased by the onward march of prices. The stock market is volatile by nature, and you should expect the value of your portfolio to fluctuate over time widely.
Because public sentiment about future economic conditions drives stock prices, the market frequently rises even before broader economic measures, such as gross domestic product (GDP) growth, begin to tick up. While the two often go together, a bull market is not the same as economic growth. A bull market describes a sustained increase in prices within the securities market, while economic growth describes an increase in a country’s economic output. A common definition of a bull market is an increase in stock prices of at least 20%, commonly measured by the S&P 500 in the United States. However, a bull market can refer to rising prices of securities other than stocks.
One of these upward trends can continue for as little as a few months or as long as several years. But one common rule of thumb is a 20% price increase from the most recent low. This rise could coincide with signs that prices will continue to grow. The value of gold decreased as the gold bear market continued for the most part from 1987 to 2001, after which gold experienced some spectacular bull runs. On the chart below, we can see a further close-up into the years 1949 – 1956 trend. In a growing economy, banks tend to lower their interest rates on loans, and it encourages business and entrepreneurial activity and allows more companies to expand.
However, as spending and production increase, the prices of goods and services can inflate. Many different variables can ignite the broad, upward trend in asset values that characterizes a bull market. For example, changes in the business cycle can help contribute to a bullish trend. Things abruptly ended when the Covid-19 pandemic-induced shock caused a major market crash in February 2020.
They often vary from bear market strategies due to more favorable market conditions. Having a higher stock allocation in a bull market is optimal as there can be more returns, whereas in a bear market investors remain more cautious. The Internet era in the 90s started the second-longest bull market to date. An era of prosperity that was driven by investors seeing potential in investing in tech companies.
The use of long positions in stocks, ETFs, and call options is appropriate in bull markets and periods of strong market performance. Short selling, put options, and short or inverse ETFs, on the other hand, are appropriate for bear markets and allow investors to profit on the market’s downturn. One clear indicator of a bull market is continued gains in the prices of assets that benefit from economic growth and strengthening business conditions, for example stocks. When the price of these securities keeps pushing higher, investors are frequently confident that this upside will continue, therefore fueling additional purchases of these assets. A bull market happens when the value of securities increases, whereas a bear market takes place when the value of securities decreases over an extended period of time.
Monitoring the P/E helps investors make decisions on their investments. Bull markets generally start when the economy is strengthening or is already strong. They tend to coincide with a strong gross domestic product (GDP), a drop in unemployment, and a rise in corporate profits. The stock market’s average annual return from 1926 to 2021 was 12.3%. With that in mind, long-term investors shouldn’t get caught up in the type of market they’re in but stick to their investment strategy.
Bonds provide a place to park money outside of the stock market so that it’s ready for spending or reinvestment in the event of a downturn. Public sentiment is another potential signal of a transition between bull and bear markets, according to Paré. It’s important to keep in mind that bull markets don’t only happen when times are good.