You may have heard the term “bull market” before, without really understanding what it means. Perhaps you nodded along as your friends discussed their investments or scrolled past an article or two on your social feed. Maybe you’ve been to New York and seen the giant bull statue on Wall Street and wondered vaguely: “Why a bull?”
If so, this one’s for you.
What is a bull market?
A market or asset class is considered to be “bullish” whenever stock prices are rising or are expected to rise. We call it a bull market when that rise in prices or growth is sustained for an extended period of time and exceeds 20% from its previous low. Bull markets often occur between recessions and can last several years at a time.
Why a bull? People often explain it this way: Just like a bull’s horns point upward, the stock market trends up during a bull market. On the other hand, a bear’s claws naturally point down, just like a stock market during a bear market. Honestly, no one really knows the origin of either term. It’s just investor jargon.
What happens in a bull market?
A bull market has several key characteristics. Apart from sustained growth, bull markets are also marked by widespread investor optimism and confidence. This confidence is actually a major driver when it comes to keeping a bull market bullish because confident investors typically keep investing. During a particularly strong bull market, it’s not uncommon to see valuations double or even triple. If a bull market continues for too long, however, asset bubbles can form. When these bubbles inevitably pop or shrink, investors can see a decline in their respective investments. The 1990s dot-com tech bubble is a good example of this. During the period of 1995 to about 2000, the NASDAQ Composite Index rose by 400% only to drop over 75% from the top by October 2002.
A bull market also typically goes hand in hand with a strong national economy and gross domestic product (GDP), with widespread demand for goods and services. As a result, unemployment generally remains low.
Bull vs. bear market explained
Unlike a bull market, a bear market is characterized by a sustained 20% downturn in the market. Stock prices can fall for a number of reasons, including lower employment, a significant market event, lower investor confidence, dwindling demand for goods and services or interest rate changes introduced by central banks. In many ways, a bear market is the opposite of a bull market. While a bull market is accompanied by a strong economy, bear markets often accompany or precede recessions. Learn more about bear markets here.
If you’re a new investor, you may want to consider…
- Investing in quality companies. Even though many types of companies will rise in value, quality companies are the more likely to retain that value in your portfolio over time. These are companies that might make a good investment should have a strong history of stability and growth.
- Staying focused on your goals and overall financial plan. By focusing on your goals, rather than the market alone, you may be in a better position to make smart investing decisions.
- Investing over time rather than all at once. To avoid buying everything too soon or too late, a phased approach may be an option for beginner investors to explore. That way, you can see how your investments are doing before you invest more.
- Don’t try to time the market. It’s nearly impossible to perfectly time the market — no one really knows where it’s heading. New investors may want to consider small, regular investments over time.
What is a bull trap?
During a bull market, when overall investor confidence remains high, investors can find themselves in what is termed a “bull trap.” While the overall market and stock prices remain high, individual stocks or industries may experience sharp corrections. Investors may buy in to a specific stock or industry at this juncture, assuming the correction has bottomed out and prices are about to rise again, only to find that the decline continues. It’s called a trap because investors often fail to recognize the predicament they are in, given the historical growth the rest of the market has been experiencing. They may even hold on to the stock as it continues to fall until it becomes obvious there won’t be any sort of recovery. At this point the potential for a capital loss is possible.
One example of a recent bull trap began in January 2022 when the market was still bullish. Initial declines in the S&P 500 seemed to peter out by April, but instead of continuing upward again, there was a brief ascent, followed by a greater decline into June 2022.
End of the bull market: What to expect
Bull markets can last anywhere from several weeks to several years and typically end when prices have remained high for too long, investor confidence wanes or a significant event occurs that fundamentally changes the market. The last notable bull market occurred in 2021, and prior to that from 2009 to 2020 — arguably the longest bull market in history. In 2020, the bull market ended when the COVID-19 pandemic struck, and markets were shaken by sudden lockdowns and a freefall of investor confidence.
At the end of any bull market, investors can expect the return of more bearish conditions and a decline in stock valuations. A recession may follow.
Ultimately, bull markets can be an exciting time for investors and the market, but like every other part of the economic cycle, they don’t last forever. The savvy investor understands this and makes investment decisions accordingly.
Should you buy during a bull market?
It depends on the investor and the stage of the bull market which is difficult to predict. If you’re investing in what you deem to be quality stocks that you’ve taken the time to research and have confidence in, you may see investment growth during a bull market.
What is a bull trap and how to identify it?
A bull trap is a phenomenon that occurs when investors buy a stock they expect to appreciate after a brief depreciation, but only depreciates further. This can lead to losses if investors hold on too long.
What does bullish market mean?
A bullish market may not be a full-blown bull market but may be indicated when stock prices are rising.