What is a Bull Market?
A bull market refers to market conditions where prices continue to rise over a sustained period of time. The market may be described as “bullish” when prices soar. The description is most often applied to the stock market, but it can also be used to describe virtually any commodity that is being traded, including bonds, real estate, currencies, and consumer goods. A bull market can be bad news for many consumers, especially if they live on a fixed budget and cannot afford to pay more for these commodities. However, investors may benefit from a bull market if the value of their assets rises over time. Learn more about bull markets and how they can affect investors.
What Is a Bull Market?
A bull market is a condition in which prices within a particular market rise over a certain period of time, usually the stock market. The term bull market is often used loosely, but most economists define a bull market as stock prices rising by 20% after two declines of 20% each. Stock prices go up and down frequently throughout the day, but in a bull market, prices rise continuously for several weeks or longer. A bull market can last months or even years, depending on market conditions and investor confidence.
The term implies that investors feel confident that the value of the stock will continue to rise. However, predicting a bull market or its duration can be difficult. Prices are typically set by supply and demand. The more investors want to buy a stock, the higher the price will rise. The price will only continue to rise if investors believe it to be true. As soon as investors start selling their stock, the price will fall.
A bull market is often a state of mind for many investors. The numbers need to be heading in the right direction, but the person also needs to believe the trend will continue. Once prices start to rise, more investors will be interested in buying the stock, which will only drive prices even further.
Corporate profits are high in bull markets with low unemployment rates. Bull markets also tend to see an increase in the number of initial public offerings (IPOs). New companies usually see a sustained period of growth during this time, which can help them go public.
A bull market is the opposite of a bear market, which is when prices fall over a sustained period of time. The term usually only applies to the stock market. It is also not the same as inflation, which is when the prices of essential goods and services rise, and the local currency loses monetary value. Bull markets only apply to a specific type of commodity, typically stocks, such as those traded on the S&P 500 and the Dow Jones Industrial Average (DJIA).
The term bull is used because the horns of a bull are normally pointed up. There’s also the famous statue of a bull in the heart of Wall Street.
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When Do Bull Markets Happen?
The economy needs to be strong for a bull market to take effect. Investors need access to funds and capital to buy the commodity. Rising demand will also drive the price higher over time. If many people are unemployed or investors feel the economy is slowing down, they won’t have access to as much money to buy stock.
Bull markets can be hard to predict, but they are a natural part of the economic cycle. The economy will first expand, peak, contract and, finally, reach the trough, which is when the economy bottoms out. The market usually becomes bullish at the start of the economic cycle when the economy is growing, and investor confidence is high. The country will usually have a low unemployment rate with an increasing gross domestic product (GDP).
What Is an Example of a Bull Market?
Because bull markets can be so hard to predict, analysts can only recognize them once they have occurred. The most famous example of a bull market occurred in the United States in 1982 at the beginning of the Reagan administration. Stagflation, which is when the economy fails to grow as prices rise, came to an end in the early 80s. The vanishing threat of nuclear war, the promise of new technology, and less financial regulation led to years of sustained economic growth, one of the longest since the end of World War II. The era was known for its lavish wealth and became known as the 80s Boom with the famous saying, “greed is good.”
During this time, the DJIA averaged 15% annual returns. But the economy finally peaked in the early 2000s as the dot-com bubble burst. After 2000, the stock market delivered a return of -6.2%.
How to Invest in a Bull Market
Investors typically make money by investing in stock early in a bull market. Prices will continue to rise for several months or years, depending on economic conditions. Investors can then sell their stock when the economy reaches its peak to make a profit. Most people will buy and hold stock when the market is bullish, but this strategy comes with risk. It can be difficult to predict when the economy will reach its peak. This period of growth could suddenly come to an end. Investors will need to sell their stock before prices begin to fall to recoup their investment. The buy-and-hold approach is based on optimism. Once investors start to suspect the economy is headed for a recession, they will sell their stock, which can trigger a major sell-off.
What Stocks Typically Do Well During a Bull Market?
Most stocks will increase in value in a bull market, but some commodities tend to fare better than others. Technology, communication, energy, and financial stocks typically increase the most in these conditions. As the economy continues to grow, companies will start investing in new technologies to further expand their operations. Start-ups typically have an easier time attracting funding in bull markets. More people will also be spending money on energy and communication services when the economy is strong. There is also bound to be a lot of financial activity. Banks and hedge funds tend to do especially well in bull markets.
Everyone usually benefits from a bull market. Buying and selling stock during this time can lead to a high rate of return. However, the expansion will only last so long. Stock prices will eventually fall as the economy bottoms out.