What is a Bull Market and How Does it Work?

What is a Bull Market?

A Bull Market is a phenomenon in financial markets when asset prices rise continuously and the investor sentiment remains optimistic.

In simple words, it is a market condition when stocks and other assets appreciate regularly. This happens for an extended period and with an established trend.

A bull market is commonly linked to stock markets but it can be associated with other financial markets like bonds, gold, and real estate as well.

Stock prices increase and fall during a trading session/day regularly. However, if the stock prices start rising collectively in a stock market, it establishes a bull run.

There is no set definition of a bull market and its measurement. However, the most common definition is when a stock market increases by 20%, it is said to be in a bull market condition.

What are the Causes of a Bull Market?

A bull market trend is largely linked with investor confidence. That in turn, comes from better performance or expectations of better results from an economy generally.

Here are the main contributors to a bull market.

Booming Economy

Global and local economies performing well are the main reasons why companies start making more revenue.

For instance, if the US shows a positive GDP and economic activities flourish, listed companies here will show higher profits due to increased consumption of their products/services.

Increased Investor Confidence

A growing economy with positive indicators means better financial results for listed companies there.

That in turn improves investor confidence in the economy and stocks they hold. Investor psychology remains one of the biggest influencers of a bull market.

Lower Unemployment Rates

Lower unemployment rates are a result of booming economic activities. Companies increase their productive activities and hire more people by creating more jobs.

Therefore, a low unemployment rate is another key indicator of a bull market.

Higher Earning and Spending

When people start earning more, they naturally spend more. It results in further increased economic activities and higher consumer demand for consumer products/services.

Thus, the GDP keeps increasing and companies make higher revenues. Therefore, these trends eventually contribute to a positive stock market impact.

Chance of Higher Inflation

Another important indicator of a bull market can be a higher inflation rate in the long run. Higher consumer spending, low unemployment rates, and other factors may make demand levels higher and supply levels lower.

READ:  Bill of Exchange

Thus, resulting in a higher inflation rate eventually.

What are the Characteristics of a Bull Market?

As mentioned above, the most common trait of a bull market is the increase in stock prices by 20%. However, it is not the only definition and we can use some other characteristics as well.

Stock Market Indices Rise

Stock market indices are the most sought-after indicators to measure stock market trends.

S&P500, the DJIA, and NASDAQ indices are widely regarded as the stock market performance indicators. These indices keep increasing in a bull market.

Increased Revenue

The top-line revenue of companies starts increasing quickly due to increased economic activities as mentioned above.

It means when established companies (mostly those with consumer products) start posting higher revenues, it is a good indicator of a bull market.

Increased Profits

Higher revenues result in increasingly higher profits for these companies. It means these companies make more profit for the same dollar values in terms of revenue generated.

During a bull market, the majority of the listed companies will show higher profits with established trends.

Higher P/E Ratios

The P/E ratios of stock market indices generally tend to increase in a bull market. It represents the investor sentiment of buying more stocks and increasing investments in the market.

It is important to mention that the P/E ratio of a single stock may look different from the P/E ratio of an index in the same stock market.

How Long Does a Bull Market Last?

The length of a bull market cannot be predicted. In fact, no one can predict when a bull market will start.

It is a financial market phenomenon that we can only determine after evaluating certain indicators as mentioned above.

A bull market may last from a few months to a few years. The estimated average length of all bull market runs has been 3.8 years.

The Latest Bull Market

The latest and most significant bull market run started after the global financial crisis of 2008.

The S&P500 gained over 400% in March 2009 and the DJIA reached a record high of 29,551 points on the same day.

READ:  Irrevocable Letter of Credit

The bull market lasted almost 11 years from March 2009 to March 2020 when the DJIA lost around 20% and the S&P500 and NASDAQ followed the trend soon.

Types of Bull Market

Although the term bull market is commonly linked with stocks, it can be traced to other financial markets as well.

Stocks

The stock market bull runs are the most common financial market scenarios. When a stock market performs positively and gains substantially over an extended run, we call it a stock market bull run.

Bonds

Bonds are conservative investments and investors receive a lower return on investments as compared to stocks. However, it means bonds are less risky than stocks.

This has resulted in a long bullish bond market for a few decades. Investors never lose their investments in bonds and their confidence keeps the bond market bullish.

The bond market bull run has been one of the longest in the financial markets.

Gold

The gold and commodities market established a bull run in the early 2000s for the last time. The gold prices ranged between $300-$400 at that time.

Gold prices started increasing in the early 2000s and the trend continued until 2011 before it hit the record-high of $1,895.

What is a Secular Bull Market?

A secular bull market is when the bull run is established for a longer period with certain factors. It is usually a bull run of five years or above.

The secular market phenomenon is associated with both increasing or decreasing prices. Therefore, both the secular bull and secular bear markets exist.

Investing Strategies in a Bull Market

Investors can use different types of investing strategies during a bull market depending on their investment goals.

Buy and Hold

The buy-and-hold investment strategy is the most common and useful investing strategy in a bullish run. As asset prices appreciate consistently, investors gain higher profits by investing and holding their positions.

Retracement

Retracement is the reversal of increasing asset prices in a bull market. Therefore, investors can aggressively pursue their plans by investing in assets when they fall temporarily.

In a bull market, asset prices are likely to increase again. It is a moderately aggressive and riskier strategy than the “buy and hold”.

Swing Trading

Swing trading involves frequently buying and selling at lows and highs. Investors use short-selling frequently to take advantage of the falling prices and hold positions for appreciating stocks at the same time.

READ:  What is Capital Infusion?

Top Tips to Invest in A Bull Market

Here are our top tips for you to invest in a bull market.

Assess Your Risk Profile

No matter how bullish a market is, it will always keep an element of uncertainty. You will not be investing in the market but in a particular asset.

Therefore, always assess your risk tolerance and risk appetite before planning an investing strategy in a bull market.

Do Not Time the Market

When you pursue an investment strategy like a “buy and hold”, it requires careful planning. However, not even experts can accurately predict the highs and lows of the market.

Therefore, you should stick to your trading strategy and not look to time the market by waiting too long for a high or selling too early.

Diversification

As in any other market run, you should always diversify with stocks, bonds, and mutual funds. The right mix will always depend on your investment goals and risk appetite.

Invest in Established Stocks

The safest way to make the most of a bullish market is to invest in established stocks. These companies often sell consumer products and gain more value than others. These are the so-called large-cap stocks.

Are We in a Bull or Bear Market Right Now?

In the last couple of years, the markets have shown resilience overall. Some tech stocks like Google, Amazon, Facebook, and Apple have gained substantial value.

That resulted in significant gains for S&P500 and NASDAQ overall. However, the gains can only be attributed to a small number of stocks in the tech and pharmaceutical sectors largely.

Therefore, the current financial market cannot be termed a bull market. Due to soaring inflation, rising interest rates, and slowing economies, we are heading toward an economic recession and a bear market if at all.

Scroll to Top