Bull Market

What is a Bull Market?

A bull market is the condition of a financial market in which prices are rising or are expected to rise. The term “bull market” 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. Because prices of securities rise and fall essentially continuously during trading, the term “bull market” is typically reserved for extended periods in which a large portion of security prices are rising. Bull markets tend to last for months or even years.

Usually, in a bull market, stock prices rise by at least 15 percent, while 80 percent of all stock prices are on a rising spike.

What Does Bull Market Mean?

The sustained increase in the market prices is the result of increased investor confidence. As investors trust the market, they massively buy more shares, thereby trusting the financial markets with their money. As the gains grow higher, investor confidence rises as well. Investor expectations about the economy also affect the stock market.

If investors trust their government, they invest their money in the stock market, causing the stock prices to rise. Furthermore, investors actively participate in a bull market by seeking to take advantage of market opportunities and earn a higher return relative to the risk they have accepted.

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 the trends in the market might change. Part of the difficulty is that psychological effects and speculation may sometimes play a large role in the markets.

Characteristics of a Bull Market

There are several things that tend to accompany a bull market. For starters, they generally happen during periods when the economy is strong or strengthening. Bull markets are often accompanied by GDP growth and falling unemployment, and companies’ profits will be on the rise.

Additionally, one of the best non-numerical indicators for a bull market is rising investor confidence. During these times, there is a strong overall demand for stocks, and the general “tone” of market commentary tends to be positive. And because companies can get higher valuations for their equity, we tend to see high levels of IPO activity in bull markets.

The opposite of a bull market is a bear market, which is typically defined as stocks falling by 20% or more from a recent peak. Bear markets are often accompanied by recessions, falling investor confidence, and declines in corporate profits.

Bull Market History

It’s believed by some that bulls first became synonymous with rising and falling prices when people would place bets on whether dogs could kill a bull chained to a post—called bull-baiting. The bulls would use its horns to defend itself.

Others believe that bearskins were used to describe market behavior during the 18th century, when dealers in bearskins (known as bearskin jobbers) were reported to have sold bearskins before they were brought in, leading to a proverb that warned: “Don’t sell the bearskin before one has caught the bear.”

The term bear reportedly became popular in the early 18th century when referring to stocks after a trade company’s stocks collapsed after being sold by speculators who didn’t own them.

The phrases were first published in the 18th-century book, “Every Man His Own Broker,” by Thomas Mortimer. Two 19th century artists made the terms even more popular—Thomas Nast published cartoons about the slaughter of the bulls on Wall Street in Harper’s Bazaar, and William Holbrook Beard painted the stock market crash of 1873 using bulls and bears.

Longest Bull Markets in History

According to the Financial Industry Regulatory Authority(FINRA), the longest four bull markets took place in the following periods:

  • June 1949 to April 1956
  • October 1974 to November 1980
  • August 1982 to August 1987
  • October 1987 to March 2000
  • March 2009 to March 2020

The most recent bull market is the longest in history. It went from 6,594.44 in 2009, to 29,551.42, its high on Feb. 12, 2020, returning 348%.

The highest-returning bull market occurred between 1987 and 2000. Stock prices rose 582% during that period. The average return of all five bull markets since 1949 is 260.4%.

Bull Market Phases

Analysts and economists talk of three main phases to a bull market:

The first stage is referred to as the accumulation phase. It typically comes at the end of a downtrend, when everything seems at its worst. But, it’s also the time when prices are at their most attractive, because by this stage most of the bad news has already been priced in. Informed investors start to enter the market. The accumulation phase can be hard to spot and often comes amid continuing market pessimism, with many investors believing things can only get worse. The start of the accumulation phase sees a period of price consolidation, and during later stages of this phase the price of the market starts to move higher.

The second stage is known as the public participation phase. In this period, negative sentiment starts to fade as business conditions improve and economic data becomes stronger. The steady flow of good news encourages more and more investors to move back in, which sends prices higher. The public participation phase tends to be the longest lasting of the three bull market phases, and also the one with the largest price movement. Long positions are taken up by technical and trend traders as the new upward primary trend confirms itself.

The third stage of the three bull market phasesis known as the excess phase. At this point, the market becomes hot again for all investors, and informed investors start to scale back their positions, selling them off to new market entrants. The last of the buyers to enter the market do so after big gains have already been achieved. They hope that recent returns will continue, but they’re buying near the top. Smart investors look very carefully for signs of weakness in the trend. If the upward moves start to peter out, it could be a sign of an approaching primary downtrend – the onset of the next bear market.