Many investors love a bull market. It’s a time when stock prices are charging ahead and investor confidence is riding high. But exactly what is a bull market and is it a good time to invest?
In this guide, we explain some key information about bull markets. We also answer common questions such as “how long does a bull market last?” and “what are the phases of a bull market?”
What is a bull market?
A bull market is a long period of rising prices in the financial markets. Rising prices mainly affect stocks, but can also include other financial assets like bonds, property and commodities. Sometimes, rising prices can last for months or even years.
Even during bull markets, stock prices will move up and down, sometimes significantly. However, during a bull market, there is an overall trend of rising share prices and any dips are short term and not severe. Investors are generally optimistic and there is a feeling that upward prices will last for a while. In reality, stock prices are extremely hard to predict and it’s always possible that a stock market crash and a bear market are around the corner.
What are the characteristics of a bull market?
Here are some of the commonly accepted characteristics of a bull market:
There is a long-term trend of rising prices for financial assets, including stocks.
Stock prices rise by at least 20%, usually after a drop of at least 20%.
There may still be some short-term slight dips, but these will be less than 20% and occur for less than 2 months.
What makes stock prices rise in a bull market?
The following are some of the underlying conditions that may contribute to a bull market:
Strong economy. There is a rise in corporate profits across the whole country and GDP is increasing. This is a measure of the total market value of goods and services produced within a country.
Fall in unemployment. This is a good indication of a strong economy.
Low interest rates and low corporate tax. These may also contribute to a bull market as they lead to greater corporate profits.
Strong investor demand. Investors are willing to take a risk and invest in stocks.
How long does a bull market last?
According to market research by InvesTech, the average bull market lasts 3.8 years. That’s the average time taken for the stock market to climb from the bottom to its market peak.
The longest bull market on record was 11 years (between 2009 and 2020). That run finally ended with the COVID-19 crisis as equity prices plunged. On 16 March, the Dow dropped 12.9% in one day and the New York Stock Exchange suspended trading several times during that time.
What are the phases of a bull market?
Experts have identified 4 phases that occur during a bull market:
Reluctance phase: This first phase follows after a bear market, where stock prices dropped significantly. Investors are still cautious even though stock prices are low. Experienced and institutional investors may start to buy up shares to take advantage of the low prices.
Digestion phase: Individual investors start buying stocks as confidence returns to the market. Stock prices start to increase and so more investors start to buy, fuelling demand and raising prices.
Acceptance phase: Stock prices gallop away as new investors enter the market. Many companies issue more shares and new companies list on the stock exchange using an IPO. Institutional investors may sell their shares to bank their profits.
Exuberance phase: This is a period of high price volatility and high stock-trading volume. Prices are driven higher than the underlying investments are worth. Eventually, prices rise to the point where investors realise they are overpriced. This is when the tide starts to turn and prices begin to drop.
Can you predict a bull market?
It’s hard to predict a bull market, but it’s easy to spot one looking back. To quote the American filmmaker, Billy Wilder, “Hindsight is always twenty-twenty.”
Still, sometimes there are signs that the stock market may be getting near the top of its growth cycle. For example, one possible sign is when there has been a long period of stock price growth but many experts believe that stocks are overpriced compared to the underlying performance of the companies.
Can you make money in a bull market?
It’s possible to make money in a bull market if you’re a long-term investor. That’s because if you sit tight and hold onto your investments for a long time, they are likely to rise in value over the long term. You’ll have time to wait out the ups and downs of the stock market and benefit from the long-term trend of rising stock prices.
Short-term traders can also make money, but it’s much riskier than long-term investments. Here are some investor strategies:
Buy and hold: This is a potential strategy for private investors as well as traders. It simply involves owning a stock for a long period and selling it at a later date.
Increased buy and hold: This is a more risky variation on the buy and hold strategy. An investor using this strategy will add to their holding each time the stock increases in price.
Retracement: This is where investors buy stocks when the price dips. Short-term price dips take place even during a bull market.
Full swing trading: This involves more aggressive trading strategies like short-selling. Short-selling is when traders take out a financial instrument that will make them money if the stock prices drop in value.
How should long-term investors view a bull market?
Just like a roller coaster, the climb up in stock market prices is often long and slow, whereas the descent is often quick and slightly scary. But if you’re a long-term investor, that shouldn’t put you off. If you invest regularly, then you’ll sometimes buy when prices are low and sometimes when prices are high.
I’m a big believer in long-term investing. Bull market, or bear market, if historic performance is anything to go by, you’re likely to make money in the long run. That’s because stock prices tend to consistently outperform bonds and cash over longer periods.
Bottom line
A bull market is a long period of optimism in the stock market. It’s when share prices are climbing or staying steady. Bull markets last for an average of around 4 years, whereas bear markets, when stock prices drop, tend to be shorter lived.
For long-term investors, bull markets are a time to stay steady with your investing. If you pile money into the stock market when prices are high, then you could be buying just as prices reach their peak. In contrast, if you drip money in gradually, you’ll buy stocks when prices are low, high and everywhere in between.
Frequently asked questions
The beginning of a bull market often follows a period where stock prices have slumped. Investors are often cautious and it can take a long time for prices to gradually climb. After initial investor jitters, there is often a long period of stock market growth.
A bull market usually ends with a bump. It’s often followed by a bear market when share prices drop by at least 20% and stay depressed for at least 2 months.
It’s possible to make money in a bull market, depending on your investing decisions. But for long-term investors, it usually makes sense to sit tight during the ups and downs of the stock market and resist the urge to sell. That’s because long-term investing is one of the best ways to build wealth and it’s difficult to predict when the right time is to cash in your shares.
A bull market starts when stock prices start to climb after a bear market.
There was a recent bull market in the period between 2003 and 2007 as stock market prices rose gradually, with no long-term declines. It came to an abrupt end in 2008 with the global banking crisis. Stock market prices collapsed and took a long time to recover.
The origins of the terms bull market and bear market are a mystery. Some commentators think the term comes from the way bulls and bears attack their enemies. Bulls thrust their horns into the air whereas a bear strikes down when it attacks.
If you’re a regular and long-term investor, then many experts recommend ignoring the ups and downs of the stock market and continuing to regularly invest. If you invest every month, you sometimes buy when prices are high and sometimes when they are low.
A bull market is when the stock market is riding high and a bear market is when stock prices are depressed for over 2 months.
Bull and bear markets often reflect the wider economy, with bull markets more common in times of economic expansion. In contrast, bear markets often happen when the wider economy is in recession.
If there has been a long period of increasing stock prices and no significant drop in share prices for a while, then we may be in a bull market.
Alice Guy is a Suffolk-based finance writer, a busy mum of 4 older kids and a self-confessed personal finance geek. She trained as a chartered accountant with KPMG London before working for Tesco Plc as a business analyst. She loves to write about budgeting, saving, investing and building wealth. See full bio
Futures contracts, also known as just “futures”, are a derivative that let you speculate on the price movements of commodities, stock indices and currencies.
Options trading offers the right to buy at a certain price on or before a certain date. They’re different from futures as there isn’t an obligation to buy so you can “lock in” a price without having to worry about fulfilling a contract.
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