What Is a Bull Market, and How Can Investors Benefit From One? (2024)

What Is a Bull Market?

"Bull market" is the term used to describe a financial market in which prices are rising or are expected to rise. It is most 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.

Prices of securities rise and fall continuously during trading. But a bull market occurs over extended periods of time during which a large portion of security prices rise overall. Bull markets tend to last for numerous months or even years.

Key Takeaways

A bull market is a financial market in which prices for financial securities rise continuously.
The commonly accepted threshold for the start of a bull market is a rise in stock prices of 20%.
Traders employ a variety of strategies, such as increased buy and hold and retracement, to profit from bull markets.
The opposite of a bull market is a bear market, in which prices trend downward.
The term "bull market" is usually used in conjunction with the stock market but can describe any financial market that's moving upward.

What Is a Bull Market, and How Can Investors Benefit From One? (1)

Understanding Bull Markets

Bull markets are characterized by optimism, investor confidence, and expectations that strong results should continue for an extended period of time.

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.

No specific and universal metric identifies a bull market. Nonetheless, the most common gauge used is a 20% or more rise in stock prices from recent lows.

Since the start of bull markets are tough to pinpoint in the moment, analysts typically acknowledge them after they've begun. A notable bull market in recent history occurred during the period between 2003 and 2007. At this time, the S&P 500 increased by a significant margin after a previous decline. As the 2008 financial crisis took effect, major declines occurred, putting a stop to the bull market run.

Causes and Support

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.

Growing investor confidence can keep bull markets moving. The overall demand for stocks is positive, along with the overall tone of the market. However, supply and demand for securities may seesaw, e.g., supply will be weak while demand will be strong. Some investors will be eager to buy securities, while few will be willing to sell.

In a bull market, investors are more willing to take part to gain profits.

Characteristics

During a bull market, several characteristics can be observed. These include:

An increase in trading volume, as more investors buy and hold securities in the hope of realizing capital gains.
Securities tend to receive higher valuations, as investors pay more for them due to the perceived potential for price appreciation.
There's greater liquidity in the market, as there is more demand for securities and fewer sellers. This makes it easier for investors to buy and sell quickly at a reasonable price.
Companies that are performing well in a bull market may also choose to reward their shareholders by increasing dividends (which can be attractive for income-focused investors).
There may be an increase in the number of companies going public and raising capital through initial public offerings (IPOs), providing investors with the opportunity to participate in the growth of new, promising companies.

The longest bull market in the history of the S&P 500 index lasted from March 2009 to February 2020 and saw the index gain over 300%. It was characterized by strong earnings growth, low interest rates, and investor optimism. In addition, it was relatively volatile, with several corrections and pullbacks along the way. The technology sector significantly outperformed the broader market during this bull market.

How to Benefit From a Bull Market

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.

Below, we'll explore several prominent strategies investors utilize during bull markets. Bear in mind that these strategies, like all others, involve some degree of risk.

Buy and Hold

One of the most basic strategies in investing is the process of buying a particular security and holding onto it with the idea of selling it at a later date when prices have moved higher. This strategy necessarily involves confidence on the part of the investor. For this reason, the optimism that's a hallmark of bull markets helps to fuel the buy and hold approach.

Increased Buy and Hold

Increased buy and hold is a variation of the straightforward buy and hold strategy, and it involves additional risk. The premise behind this approach is that an investor will continue to add to their holdings in a particular security so long as that security continues to increase in price.

Retracement Additions

A retracement is a brief reversal in the general upward trend of a security's price. Even during a bull market, it's unlikely that stock prices will only ascend. Rather, there are likely to be short periods of time in which small dips occur, even as the overall trend continues upward.

Some investors watch for retracements within a bull market and buy the dip. The thinking behind this strategy is that the price of the security in question will quickly move back up, and the investor will have booked a discounted purchase price.

Full Swing Trading

Perhaps the most aggressive way of attempting to capitalize on a bull market is the process known as full swing trading. Investors employing this strategy use short-selling and other techniques to attempt to squeeze out maximum gains as shifts occur within the context of a larger bull market.

Examples of Historic Bull Markets

There have been several significant bull markets throughout history, each with its own unique characteristics and drivers. Here are a few examples:

The Roaring Twenties: This bull market, which took place in the 1920s, was fueled by speculation and lasted until the stock market crash of 1929. It was characterized by rapid economic growth, rising asset prices, and increased consumer spending.
The Japanese Bull Market of the 1980s: This bull market was characterized by rapid economic growth and rising asset prices. It ultimately ended with the bursting of the Japanese asset price bubble in the 1990s.
The Reagan Bull Market of the 1980s: In the 1980s, the stock market experienced a bull market that was driven by the economic policies of the Reagan administration and the strong performance of the technology sector. This bull market lasted from 1982 to August 1987 and saw the S&P 500 index gain over 100%. It ended with the Black Monday stock market crash in October 1987, which saw the S&P 500 index decline by over 20% in a single day.
The 1990s Bull Market: This bull market, also known as the dot-com bubble, was driven by the rapid growth of the internet and technology sectors. It lasted from the early 1990s until the early 2000s, and saw the S&P 500 index gain over 200%.

The 2009 Bull Market: This bull market began in March 2009 and lasted until February 2020, making it the longest bull market in history. It was driven by strong earnings growth, low interest rates, and investor optimism, and saw the S&P 500 index gain over 300%.

Bull vs. Bear Markets

The opposite of a bull market is a bear market. A bear market is characterized by falling prices and investor pessimism.

It's commonly believed that the use of bull and bear to describe markets comes from the way the two animals attack their opponents. A bull thrusts its horns up into the air, while a bear swipes its paws downward. These actions signify the movement of a market. If the trend is up, it's a bull market. If the trend is down, it's a bear market.

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.

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.

Likewise, bear markets usually set in before economic contraction takes hold. A look back at U.S. recessions reveals that a falling stock market usually comes several months ahead of GDP decline.

Market Mentalities: Bulls Vs. Bears

Why Is It Called a "Bull" Market When Prices Go Up?

The actual origin of the term "bull market" is subject to debate. The terms "bear" (for down markets) and "bull" (for up markets) are thought by some to derive from the way in which each animal attacks its opponents: A bull thrusts its horns up into the air, while a bear swipes down.

Others point to Shakespeare's plays, which make reference to battles involving bulls and bears. In"Macbeth," the ill-fated titular character says his enemies have tethered him to a stake but "bear-like, I must fight the course." In"Much Ado About Nothing," the bull is a savage but noble beast. Several other explanations also exist.

Were We in a Bull Market In 2023?

The S&P 500 entered a bull market on June 8, 2023, after rising 20% from its October 2022 lows. The index had been in a bear market since June 2022. The Dow Jones Industrial Average and Nasdaq had been in bull markets since Nov. 30, 2022 and May 8, 2023, respectively.

What Makes Stock Prices Rise in a Bull Market?

Bull markets often exist alongside a strong and growing economy. Stock prices are affected by future expectations of profits and the ability of firms to generate cash flows. A strong production economy, high employment, and rising GDP all suggest profits will grow, and this is reflected in rising stock prices. Low interest rates and low corporate tax rates also are positive for corporate profitability and stock prices.

Why Do Bull Markets Sometimes Falter and Become Bear Markets?

When the economy hits a rough patch, for instance, in the face of recession or a spike in unemployment, it can become difficult to sustain rising stock prices. Recessions are often accompanied by a negative turn in investor and consumer sentiment, and market psychology that's more concerned with fear or reducing risk than greed or risk-taking.

The Bottom Line

A bull market is a trend in a financial market characterized by rising prices and investor optimism. It can occur in the stock market as well as the bond, real estate, currency, and commodity markets.

Bull markets tend to last for extended periods of time and are marked by increased demand for securities, rising corporate profits and GDP, and declining unemployment. The opposite of a bull market is a bear market, which is characterized by falling prices and investor pessimism. The terms "bull" and "bear" are believed to come from the way these animals attack their opponents.