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What Is a Bull Market and How Does It Affect Stocks?

As you read financial media, you often come across statements that the stock market is a battle between the bears and the bulls. It’s an interesting mental image: huge animals dressed in military garb going to war over the share prices of publicly traded companies. 

OK, that’s ridiculous. Of course, “battle between the bears and bulls” is just an expression. In the stock market, bears and bulls represent individuals and entities with a certain perception of market conditions. 

Bears believe prices in the market will fall, often pushing them in that direction by selling. Bulls think market prices will rise, often buying and leading to a self-fulfilling prophecy that pushes stocks to record highs. The two create the market volatility traders bank on. When the bulls take control of the figurative battle, the market is said to be a bull market. 

What Is a Bull Market?

A bull market is a sustained period of time when mutual fund, exchange-traded fund (ETF), and stock prices are generally headed upward. Of course, there are peaks and troughs, but on average, assets in a bull market head higher. 

You own shares of Apple, Amazon, Tesla. Why not Banksy or Andy Warhol? Their works’ value doesn’t rise and fall with the stock market. And they’re a lot cooler than Jeff Bezos.
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Although not everyone agrees on the characteristics of a bull market, analysts generally consider a bull market any 20% gain following a recent market correction or crash. Investors and analysts typically measure bull markets using stock market indexes like the Dow Jones Industrial Average (DJIA), S&P 500 market index, and Nasdaq composite index rather than looking at individual stocks. 

How a Bull Market Works

A bull market, also known as a bull run, starts at the end of a downward cycle in the stock market. In most cases, bull markets take place during a positive economic cycle and have a strong correlation with positive gross domestic product (GDP) growth. 

After a correction or market crash, when the economy and markets begin to recover, investors tend to look for undervalued stocks while market prices are low. As investors ditch safe havens like gold and silver and use the money they’ve freed up to buy into the stock market, stock prices start to trend upward. 

The upward trend builds investor confidence, turning the overall opinion of the market bullish, which creates a positive feedback loop. Investors on the sidelines see others making meaningful profits and decide to jump in, increasing demand for stocks and sending market prices further up. 

As long as GDP and other economic indicators continue in the positive direction and investor sentiment remains bullish, the bulls continue to run. 

However, over time — typically a period of several years — stock valuations will grow to become too high, forcing a market correction and potentially pushing the bulls back as the bears take over. 

In short, the bull market is the longer of the two stock market cycles, the bull and bear markets. Bull markets last for about 3.8 years on average, according to InvesTech, whereas bear markets typically last for less than a year. There are often flat periods between the two extremes. 

Effects of a Bull Market

The bull market is a term that pertains to the stock market, but people feel its effects from Wall Street to Main Street. That’s because the stock market plays such an integral role in the economy. 

The stock market provides the funding corporations need to grow their businesses. As these corporations grow, they contribute to rising GDP, more jobs, and positive economic metrics all around. 

Bull markets support positive economic activity. 

When the market is trending up, more people want to invest, meaning there’s more demand for stocks. When there’s more demand for stocks, corporations have more access to liquidity — the funding they need to grow. 

As corporate profits grow, corporations are worth more money to investors, sending stock prices up and leading to a cycle of improving economic and market conditions. Bull markets don’t just make your investment portfolio shine, they improve conditions for everyone — investors and non-investors. 

Positive economic conditions lead to improved consumer confidence. More confident consumers are more likely to make big purchases, propping up the real estate and automobile markets. 

In the most recent bull market — the longest bull market on record — even experimental asset classes like cryptocurrency and NFTs saw dramatic gains as investors and traders looked anywhere they could to take advantage of the positive sentiment. 

As with any economic or market cycle, however, a bull market has a lifespan. Eventually, the bulls run out of steam and the bears take hold. This generally happens in one of two ways:

  • A Correction. A correction is a 10% or larger drop in stock prices over a period of days, weeks, or months. Corrections are generally the easier of the two endings to see coming because they tend to happen when stocks become significantly overvalued. 
  • Market Crashes. Market crashes are largely unexpected events that result in declines of 20% or more, typically over the course of days or weeks. These are significant events that usually usher in bear markets. 

Knowing that bull markets come to an end, often in unexpected ways, it’s crucial to think rationally as you invest, even when the bulls are running and it seems like nothing can go wrong. Always keep a well-balanced portfolio that gives you access to gains in the bull market but protects you from a sudden crash. 

What to Do in a Bull Market

Bull markets are great periods for investors because most stocks are trending up. But that doesn’t mean you should blindly dive into every investment that comes your way. Investors use a wide range of strategies to invest in a bull run. Some of the most popular include:

  • Value Investing. It’s best to start value investing at the bottom of the bull market when stocks are still heavily undervalued. Use a mix of valuation metrics to determine which of the stocks you’re interested in have the largest undervaluations and take advantage of the discounts. 
  • Growth Investing. The bull market is the time for growth, so why not tap into it? Look for stocks that have a compelling history of producing strong revenue and earnings growth with a mix of stock price appreciation. 
  • Invest In Cyclical Stocks. Some stocks have a strong correlation with economic conditions. When economic conditions are positive, cyclical stocks grow like weeds. Look for stocks in categories like tech, travel, and automobile manufacturers. 
  • Always Diversify. Even in bull markets, individual stocks can fall on hard times. Don’t over-allocate funds to any individual investment. Instead, keep diversification in mind. If you don’t have the time to manage a heavily diversified portfolio, consider investing in exchange-traded funds (ETFs) and mutual funds. 
  • Get Into Small-Caps. Small-cap stocks have historically performed better than their large-cap counterparts during bull markets. Add a healthy dose of small-cap plays to your portfolio to take advantage of the trend. 

You can also add to these strategies by bringing retracement additions to the mix. A retracement is when an asset is trending in one direction and takes a small break to move in the other direction. In the bull market, retracement happens when stocks dip. 

These retracements represent the perfect times to buy. 

Add to your positions any time a dip happens to take advantage of the continuation of the bull market on the other side of the retracement. 

Bull Market Example

The longest bull market in history recently came to an end with the introduction of COVID-19. The bull run started in 2009 after the massive market crash in 2007-2008. 

The economic impact of the market crash was unavoidable and the Great Recession set in. The Federal Reserve slashed interest rates to record lows in an attempt to spur economic activity through lending. It also added billions of dollars in assets to its balance sheet in a process known as quantitative easing.

Soon, the excess liquidity the Fed was pumping into the economy took hold. Corporate profits were rising, companies were hiring, and consumers were spending money again. Of course, this sent the stock market on an upward trajectory. 

That bull run would last for more than 11 years. In 2020, the COVID-19 pandemic caused a market crash that ended the longest bull market in history.  

Bull Market FAQs

A bull market has a profound impact on the stock market and the economy. This means it plays a role in your financial well-being whether you invest or not, so it makes sense if you have a few questions on the topic. 

What’s the Difference Between a Bull Market & a Bear Market?

Bull and bear markets are polar opposites. A bull market is an extended period of time in which stock prices are headed up overall, while a bear market is an extended period of falling asset prices. 

Although these are very different markets, one wouldn’t exist without the other. Bull markets typically follow and are followed by bear markets and vice versa. 

What Are the Signs a Bull Market Is Coming?

There are a few signs that a bull market could be on the horizon:

  • Low Market Valuations. During a financial market downturn, investors typically push stocks down to tremendously low valuations, as often measured by metrics like price-to-earnings (P/E) ratio or the Shiller P/E (CAPE) ratio. When you start to see valuations that suggest, “you should get in on this,” a bull market might be around the corner. 
  • Fear Is High. The overall feeling in the market at the end of a bearish run is generally, “I need to get out before I lose it all.” If you’re still holding at this point, chances are you’ve hit the bottom. Blue skies are ahead, don’t lock in your losses by selling now. 
  • Federal Reserve Interest Rates. If bear markets last too long and have too profound of an effect on the economy, the Federal Reserve typically reduces interest rates. This spurs lending and economic growth and tends to signal the start of a bull market. 

How Long Do Bull Markets Last?

Bull markets last nearly four years on average, but there are plenty of exceptions to the rule. The bull market that started in 2009 just after a global financial crisis was the longest in history, lasting about 11 years. 

Final Word

Bull markets are exciting, but they’re also dangerous for asset buyers. When prices are up and euphoria spreads across the market, it’s easy to fall under the illusion that nothing can go wrong. That notion couldn’t be further from the truth. 

Even in bull markets, some stocks underperform. Moreover, there’s no way to tell when the next bear market will set in with 100% accuracy. It’s always important to do your research and choose your investments wisely. 

With a little due diligence and the bull market on your side, you have the potential to generate meaningful returns. 

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