Bull Market Definition: Characteristics & Examples
What is a bull market?
A bull market is a financial market condition in which prices are rising or are expected to rise. The term “bullish market” is often used to refer to the stock market but can be applied to anything that is traded, such as bonds, real estate, currencies, and commodities.
Since the prices of securities essentially go up and down continuously during trading, the term “bullish market” is usually reserved for long periods in which a significant portion of the price of a security is rising. Bull markets tend to last for months or even years.
- A bull market is a period of time in financial markets when the price of an asset or security is constantly rising.
- The generally accepted definition of a bull market is when stock prices rise by 20% after two declines of 20% each.
- Traders use a variety of strategies, such as leverage, hold and redemption, to profit from bull markets.
Understanding emerging markets
Bull markets are characterized by optimism, investor confidence, and expectations that strong results should last for an extended period of time. It is difficult to constantly predict when trends in the market may change. Part of the difficulty is that psychological and speculative influences can sometimes play a large role in the markets.
There is no specific, universal metric used to define a bull market. However, perhaps the most common definition of a bull market is a situation in which stock prices rise by 20%, usually after a 20% decline and before a second decline of 20%. Because bull markets are so difficult to predict, analysts can usually only learn about this phenomenon after it has occurred. The period between 2003 and 2007 was one of the prominent bull markets in recent history. During this time, the S&P 500 rose by a large margin after an earlier decline; As the 2008 financial crisis came into play, significant declines occurred again after the bull market rush.
Characteristics of a bull market
Bull markets generally occur when the economy is strong or when it is really strong. They tend to occur in line with strong gross domestic product (GDP) and low unemployment and often coincide with a rise in corporate profits. Investor confidence also tends to rise during a bull market period. The overall demand for stocks will be positive, along with the general tone of the market. In addition, there will be an overall increase in the volume of IPO activity during bull markets.
Notably, some of the above factors are more easily quantifiable than others. While corporate earnings and unemployment are quantifiable, it can be difficult to gauge the general tone of market commentary, for example. The supply and demand for securities will fluctuate: the supply will be weak while the demand will be strong. Investors will be eager to buy the securities, while few will be willing to sell them. In a bull market, investors are more willing to participate in the (stock) market in order to make a profit.
Bull markets vs bear markets
Unlike a bull market, a bear market, which is characterized by lower prices and is usually shrouded in pessimism. The popular belief about the origin of these terms suggests that the use of “bull” and “bear” to describe markets comes from the way animals attack their opponents. The bull pushes its horns in the air, while the bear beats its claws down. These actions are metaphors for market movement. If the trend is up, then this is a bullish market. If the trend is down, that means the market is down.
Bull and bear markets often coincide with the economic cycle, which consists of four phases: expansion, peak, contraction, and trough. The onset of a bull market is often a leading indicator of economic expansion. Since general sentiment about future economic conditions drives stock prices, the market often rises even before broader economic measures, such as gross domestic product (GDP) growth, begin to pick up. Likewise, bear markets are usually set before an economic downturn takes hold. A look at a typical recession in the United States reveals that the stock market plunged several months before the drop in GDP.
Market Mindsets: Bulls Vs. bear
How to take advantage of a bull market
Investors who want to take advantage of a bull market should buy early to take advantage of higher prices and sell when they reach their peak. Although it is difficult to determine when the bottom and the peak will occur, most losses will be insignificant and usually temporary. Below, we’ll explore several notable 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 involve at least some degree of risk.
Buy and keep
One of the most basic investing strategies is the process of buying and holding a particular security, possibly selling it at a later time. This strategy necessarily includes confidence on the part of the investor: why hold on to a stock unless you expect its price to go up? For this reason, the optimism that accompanies bull markets helps fuel the buy-and-hold approach.
Increase purchase and retention
Increased buy-and-hold is a variation of the straightforward buy-and-hold strategy, and involves additional risks. The premise behind the incremental buy-and-hold approach is that the investor will continue to add to his holdings in a particular security as long as it continues to increase in price. One common way to increase holdings is that the investor will buy an additional fixed amount of stock for each increase in the stock price for a predetermined amount.
Payback is a brief period during which the general trend of a security’s price is reversed. Even during a bull market, stock prices are only likely to rise. Alternatively, there are likely to be shorter periods of time when small dips will also occur, even as the overall trend continues to climb. Some investors watch retracements within a bull market and move to buy during these periods. The idea behind this strategy is that, assuming a bull market continues, the price of the security in question will quickly rise again, providing the investor with a discounted retroactive purchase price.
full swing trading
Perhaps the most daring way to try to take advantage of a bull market is a process known as full swing trading. Investors who use this strategy will take very active roles, using short selling and other tactics to try to squeeze maximum gains as shifts 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 stagflation in 1982 and ended during the dotcom crash in 2000. During this secular bull market—a term for a bull market lasting for many years—the Dow Jones Industrial Average (DJIA) ) average annual returns are 15%. The Nasdaq, a tech-heavy exchange, increased its value fivefold between 1995 and 2000, rising from 1,000 to more than 5,000. An extended bear market was followed by a bull market 1982-2000. From 2000 to 2009, the market struggled to establish a foothold and achieved an average annual return of -6.2%. However, 2009 saw the beginning of a bull run that lasted more than ten years. Analysts believe that the last bull market began on March 9, 2009, and was mainly led by a rebound in technology stocks.
Why is it called a “bull” market when prices are rising?
The actual origin of the term “bull” is debated. Some believe that the terms “bear” (for bear markets) and “bull” (for high markets) derive from the way each animal attacks its opponents. That is, the bull will raise its horns in the air, while the bear will slide down. These actions were then figuratively linked to market movement. If the trend is up, it is considered a bullish market. If the trend is down, it means that it is a bear market.
Others refer to Shakespeare’s plays, which refer to battles in which bulls and bears took part. In “Macbeth,” the ominous character says his enemies have tied him to a stake but “like a bear, I must fight the path.” In Much Ado About Nothing, the bull is a savage but noble beast. Several other explanations also exist.
Are we in a bull market now?
Generally, a bull market exists if the market rises 20% or more above its near-term lows. Since the massive market sell-off during the 2008-2009 financial crisis, the stock market has shown a resilient bull market, rallying exponentially, reaching all-time highs more than a decade after the market crash (despite some sharp pullbacks along the way) .
What makes stock prices rise in a bull market?
Bull markets often exist alongside a strong, strong, and growing economy. Stock prices are informed by the future expectations of earnings and the ability of companies to generate cash flows. A strong production economy, high employment and high GDP indicate continued earnings growth, and this is reflected in higher stock prices. Low interest rates and low corporate tax rates are also positive for corporate profitability.
Why do bull markets sometimes falter and turn into bear markets?
When the economy is facing a rough patch, for example in the face of recession or high unemployment, it becomes difficult to keep stock prices high. Moreover, a recession is often accompanied by a negative shift in investor and consumer sentiment, as market psychology becomes more concerned with fear or risk reduction than with greed or risk taking.