Broadly speaking, a bull market is a sustained period -- usually months or years -- when prices rise. The term is most commonly used in reference to the stock market, but other asset classes can have bull markets as well, such as real estate, commodities, or foreign currencies.
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What exactly is a bull market?
Usually, a bull market marks a 20% rise in stock prices, which follows a previous 20% decline and is followed by another 20% decline. As you can see from the chart below, there was a bull market that began in 2003 and ended when the S&P 500 hit its peak in 2007.
Source: YCharts
But there's one important caveat: The dates of a bull market can only be known in retrospect.
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 gross domestic product (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 initial public offering, or 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.
Learn more: Bull vs. Bear Market
How to invest in a bull market
Regardless of what the market is doing, you should maintain a long-term focus to cultivate long-term wealth. While it can be a smart idea to invest when stocks are cheap, it's unwise to try to time the market. Great long-term businesses can be found in any market.
One smart thing to do is learn the principle of dollar-cost averaging. This involves investing equal dollar amounts at specific time intervals, which can help you invest during a bull market while allowing your portfolio to benefit from corrections and crashes as well.
Historic bull markets
As an example, consider the 2009-2020 bull market, which was the longest in stock market history. After plunging as a result of the 2008 financial crisis, the S&P 500 bottomed out in March 2009 and then proceeded to climb until early 2020 when the COVID-19 pandemic sent stocks crashing.
Source: YCharts
Related investing topics
Prior to the latest one, there was a lengthy bull market that lasted from 2002 until the late-2007 bear market that coincided with the financial crisis. The bottom line is that bull markets tend to be several years in length and are always preceded by and ended by bear markets.
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Now, let's delve into the concepts covered in the article:
Bull Market:
A bull market is a prolonged period, often spanning months or years, characterized by rising prices in various asset classes. While the term is commonly associated with the stock market, it can also apply to real estate, commodities, or foreign currencies. The article notes that a bull market in stocks typically involves a 20% rise following a prior 20% decline, with another 20% decline following the peak.
Characteristics of a Bull Market:
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Economic Strength: Bull markets usually coincide with periods of economic strength or improvement. This is marked by indicators such as gross domestic product (GDP) growth and decreasing unemployment.
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Company Profits: In a bull market, companies tend to experience rising profits. This is often reflective of the overall positive economic conditions.
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Investor Confidence: Rising investor confidence is a key non-numerical indicator of a bull market. During these periods, there is a strong demand for stocks, and market commentary tends to be positive.
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IPO Activity: High levels of initial public offering (IPO) activity are common in bull markets. Companies can get higher valuations for their equity during these times.
Bear Market:
Conversely, a bear market is characterized by a 20% or more decline in stock prices from a recent peak. Bear markets often coincide with recessions, falling investor confidence, and declines in corporate profits.
Investing in a Bull Market:
The article suggests maintaining a long-term focus for cultivating wealth and emphasizes the principle of dollar-cost averaging. This strategy involves investing equal dollar amounts at specific intervals, allowing investors to benefit from market corrections and crashes.
Historic Bull Markets:
The article highlights two significant bull markets:
- The 2002-2007 bull market, which ended with the financial crisis.
- The 2009-2020 bull market, the longest in stock market history, which was interrupted by the COVID-19 pandemic in early 2020.
Related Investing Topics:
The article touches on related investing topics, such as how to invest in index funds, a step-by-step guide on investing money, industries that thrive during recessions, and the benefits of compound interest accounts.
In conclusion, understanding the dynamics of bull and bear markets is crucial for investors, and adopting a long-term, disciplined approach can be a wise strategy in navigating various market conditions.
