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What Is a Bull Market, and How to Invest During One

A bull market is an extended period of rising prices within the stock market. The resulting momentum can lead to massive investor returns.

by | Last updated 25 Jan, 2023 | Stock Market

The horn of a large brown bull

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A bull market is the opposite of a bear market. It’s sometimes known as a bull run and describes when stock market indices, like the FTSE 250 or S&P 500, enjoy significant upward momentum. However, just like a bear market, it can actually apply to any asset class besides stocks as well such as bonds, currencies, commodities, and real estate.

The technical definition of a bull market is when asset prices of a collection of financial securities rise more than 20% from their most recent low and is sustained for at least two months. This level of upward momentum typically happens gradually over time when investor confidence steadily improves after a bear market.

That’s why bull markets have historically often occurred directly after economic and financial instability. As employment starts to recover, the level of consumer spending rises, leading to economic growth. With businesses reporting higher corporate profits, demand for stocks recovers, creating positive investing momentum.

Why is it called a bull market?

The origin of the term “bull market” or “bullish market” is the same as the origin of “bear market”. In the 1700s, bear skin traders often agreed to sell hides at a given price before possessing them. They were speculating that the price of bear skins would decline by the time they needed to deliver, resulting in a bit of extra profit. It’s actually one of the earliest documented cases of short selling.

Since they were operating with the hope prices would fall in the future, the term “bear” became assigned to the stock market when share prices were in significant decline. What about the term “bull”?

Blood sports, where animals were pitted against each other, were very popular in the past. Bears and bulls were often forced to fight, as they were considered equals and opposites. And since the opposite of down is up, the term “bull market” was coined to describe the stock market when share prices were significantly increasing.

Another potential origin for the two phases is the animals themselves. When bears attack, they swipe their claws down – a metaphor for rapidly declining stock prices. By comparisons, bulls attack by swiping their horns up – a metaphor for quickly rising stock prices.

Characteristics of a bull market

Beyond a sustained upward momentum in the financial markets, bull markets also have other characteristics.

  • Strengthening Economy – Most bull markets occur directly after a period of decline and economic weakness. As unemployment drops, consumer disposable income increases resulting in higher spending and growth. This, in turn, leads to more jobs being created, making the economy stronger.
  • High Investor Sentiment – With corporate profits usually coming ahead of guidance, target milestones are often exceeded, resulting in investors becoming more optimistic. With share prices rising, other investors pool their capital into the stock market, creating more positive momentum and leading to asset values increase over the long term.
  • Increased Demand – With the economy getting stronger and investor optimism rising, demand for investing in shares increases. As such, companies seeking to go public may accelerate the process of their initial public offering (IPO) and get their shares listed sooner.
  • Higher Earnings – With consumer spending increasing, demand for goods and services increases allowing companies to achieve higher growth and deliver superior corporate profits.
  • Increased Investment – The increase in business earnings may push management teams to be more optimistic about the future. As such, capital allocation strategies and budgets are adjusted to make room for additional investments into near-term and long-term projects.
  • Lower Interest Rates – During economic turmoil, central banks like the Federal Reserve and Bank of England will often lower interest rates to stimulate economic growth. These low-interest rates are often held in place during a bull market, providing inflation doesn’t rise beyond the standard target threshold of 1% to 3%.

How long is the average bull market?

Each bull market throughout history has occurred under different circumstances. As such, each has a different length, some shorter than others.

Here in the UK, the last major bull market lasted ten years and nine months, from April 2009 to February 2020. And the longest bull market in UK history started in January 1975, lasting 12 years and ten months.

Across the pond in the United States, there have been quite a few bull markets throughout the S&P 500 index’s history. On average, a bull market will rise by 121% and last approximately 1,102 days or three years. By comparison, a bear market is typically much shorter, with an average of 289 days or 9.6 months.

StartEndDuration (Days)% Gain
12 June 192807 September 192945274
13 November 192910 April 193014846.8
01 June 193207 September 193298111.6
27 February 193318 July 1933141120.6
21 October 193306 February 193410837.9
14 March 193506 April 193638992.4
29 April 193606 March 193731138.1
31 March 193809 November 193822362.2
08 April 193925 October 193920029.8
10 June 194009 November 194015226.8
28 April 194214 July 194344269.2
29 November 194329 May 194691275.2
09 October 194615 June 194861520.8
13 June 194902 August 19562,607267.1
22 October 195712 December 19611,51286.4
26 June 196209 February 19661,32479.8
07 October 196629 November 196878448
26 May 197011 January 197396173.5
03 October 197428 November 19802,248125.6
12 August 198225 August 19871,839228.8
04 December 198724 March 20004,494582.1
09 October 200209 October 20071,826101.5
09 March 200919 February 20203,999400.5
23 March 202003 January 2022651114.4
Source: Yardeni Research, Inc.

How to invest during a bull market?

Understanding the characteristics of an average bull market can help investors capitalise and plan a suitable strategy to capitalise on the investment opportunities they create. Armed with this knowledge, these periods of prolonged upward momentum can lead to significant wealth building.

With that said, how should investors position themselves to make the most of the next bull market?

1. Build up or replenish cash reserves

During a bear market, investors may have used up some of their cash reserves to avoid being forced into selling terrific stocks are terrible prices. With the markets back on the rise and investments delivering improving returns, the early days of a bull market serve as a suitable time to replenish a savings account in preparation for the next inevitable bear market.

2. Focus on the long term

As investor sentiment rises, a lot of excitement can build up, resulting in rapid share price growth. However, often these spikes are unsustainable. And trying to chase the next short-term blip isn’t a winning strategy. Instead, investors should focus on identifying and investing in high-quality enterprises with plenty of long-term potential to reap the benefits of sustainable gains.

3. Diversify across high-quality stocks

Even in a bull market, stocks and industries can still suffer significant declines. Diversification is one risk management tool investors can use to easily protect their portfolios from overexposure to any individual business or sector. By owning a basket of top-notch companies, the impact of one failing to meet expectations can be mitigated by the others.

4. Buy and hold

Buying and holding quality shares isn’t the most exciting investment strategy. However, during a bull market, it’s a proven method to build significant sustainable wealth, providing the investor can identify strong businesses.

5. Speak to a professional if needed

Picking stocks, building an investment portfolio, and managing one is a time-consuming task that requires exceptional skill and emotional discipline that many individuals don’t have. For investors without the knowledge, time, or interest to keep a handle on their portfolios, it may likely be prudent to speak to a qualified independent investment adviser. While these experts can be expensive, a poorly constructed portfolio could be a far greater expense.

The bottom line

A bull market is an investor’s paradise. The economy is flourishing, stock prices are rising, consumer spending is increasing, corporations are reporting better earnings, and more employment opportunities exist.

While it seems all flowers and daisies and investing seem a piece of cake, beware! It’s very important to understand how the bull market works and how to invest intelligently during this market phase. After all, when investor optimism gets too high, stock market bubbles start to form, leading uninformed investors astray.

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This article contains general educational information only. It does not take into account the personal financial situation of the reader. Tax treatment is dependent on individual circumstances that may change in the future, and this article does not constitute any form of tax advice. Before committing to any investment decision, an investor must consider their individual financial circumstances and reach out to an independent financial advisor if necessary.

Written By

Saima Naveed

Saima spent the early days of her career advancing the finance office of a prominent manufacturing business. After taking a sabbatical, she decided to use her expert knowledge and apply it to the stock market. Now, 10 years later, she manages a substantial portfolio built using detailed and thorough analysis.

Outside The Money Cog, Saima is an avid supporter of empowering women in the workplace. She is currently working very closely with Women of Wonders Pakistan to help other women achieve their career goals.

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Edited & Fact Checked By
Zaven Boyrazian MSc

Zaven has worked in several industries throughout his career, from aircraft factories to game development studios. He has been actively investing in the stock market for the better part of a decade, managing over $1 million across multiple portfolios.

Specializing in corporate valuation, Zaven employs a modern take on the principles set out by Benjamin Graham to find new opportunities at fair prices.

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