What is a bull market? What it means, how it works, and when to invest (2024)

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• A bull market is an extended period when prices for stocks or other assets are steadily on the rise, usually during the expansion phase in the business cycle.
• Bull markets are usually accompanied by high investor confidence and a strong overall economy.
• Trying to time a bull market is harder than it looks, and most investors should stick to their long-term strategy and goals.

If you're at all interested in the world of investing, you'll notice the phrase "bull market" comes up a lot in common parlance. "The bulls were out today," says some strategist on TV or Twitter. But what does it mean to be in a bull market, and how does it affect you?

Let's break down just what bull markets are, how it differs from a bear market, and what they mean for both institutional and individual investors.

What is a bull market?

A bull market (aka a bull run) is a long, extended period in the market when overall stock prices are on the rise.

"Bull markets happen when the economy is strengthening and stock prices are rising," says Teresa J.W. Bailey, CFP and senior wealth strategist at Waddell & Associates.

There's no formal metric that defines a bull market. But one common rule of thumb is a 20% stock price increase from the most recent low, with signs that prices will continue to grow.

"Unemployment in the black African American community is lower than it has been in the past," says Christian Nwasike principal & executive managing partner at Practice Managment Consultants, LLC and chairman of the board of the Association of African American Advisors. "Since more people work, they can invest money in the market for long-term planning on whatever they choose."

The term is most often applied to the stock market, as measured by the major indexes: the , the tech-heavy Nasdaq, and the Dow Jones Industrial Average. But bull markets can apply to any market, from individual stocks to other assets such as real estate, bonds, and currencies.

A bull market is the opposite of a bear market, which happens when stock prices fall 20% from their latest peak. The nomenclature makes it easy to remember the difference: When provoked, bulls charge and are known for running at great speed, and so they became a symbol for a surging stock market. In contrast, surly, defensive bears are associated with hibernating — hence, it became an ideal metaphor for a declining or sluggish stock market.

What causes a bull market?

A bull market tends to occur when the economy is strengthening from increased business investments and higher consumer spending. As people spend more on goods and services, businesses are able to pull in more revenue, create jobs, and invest in new technologies.

The more the economy can grow, the longer the bull market can run. However, as spending and production increase, the prices of goods and services can inflate. Too much inflation can end up hurting the economy.

Are we in a bull market?

After the October 2022 low point, the stock market was able to recover some of its losses in the fourth quarter. But experts are mixed on whether 2023 will be a good year.

Some investments — like the Mega Cap tech stock, which is approaching a 50% gain compared to 2022 — are showing promising improvements. The S&P 500 has increased by nearly 19% since its low point last October and is on the brink of transiting into a bull market.

But don't celebrate quite yet as some stock experts are still mixed on what the rest of the year could look like and are still maintaining pessimistic views. While some experts are optimistic about the market's ability to recover the previous year's losses, others fear an impending recession as banks fail, the labor market continues to struggle, and real estate interest rates rise.

Why is it called a bull market?

Though a charging bull and a hibernating bear are useful images, bear and bull markets are thought to have gotten their names from the way they attack. Bears swipe down at their prey while bulls buck their heads up.

The term "bull" is also believed to describe how confident investors "charge" the market, much like how provoked bulls tend to charge at full speed toward their opponents.

How raising the debt ceiling could affect the stock market

The Senate voted to pass the Fiscal Responsibility Act on January 1, 2023, which would suspend the debt ceiling through January 2025. This deal would also restrict 2024 and 2025 spending. Potentially, this could leave the stock market in a tentative state of increased volatility, as an individual's creditworthiness is weighed down. In turn, this may increase future borrowing costs and expenses.

A similar event occurred back in 2011 when the US government teetered toward an "X-date" (an estimated time at which the US government is unable to continue paying bills). Three weeks after passing the debt ceiling raise, the market index dropped by 12%.

Key traits of a bull market

Though the two don't always move in strict tandem, bull markets often reflect an "up" period in the general economy — specifically, the expansion phase of a business cycle, when GDP is increasing as well as consumer spending and industrial production.

The main characteristics of a bull market include:

• Increase in investor confidence: With stock prices increasing, investors are convinced they'll keep doing so, so they keep buying. This further increases stock prices, due to supply and demand.
• Companies bet more on their future: Buoyed by consumer buying, businesses focus on expansion and invest in themselves.
• Unemployment rates go down: With companies expanding, they hire more employees, decreasing the unemployment rate. Average wages go up, as companies compete for workers. Workers are also more likely to look for a job since they have a better chance of finding one that pays them more than their current job.
• Money is easier to spend: Increased wages mean customers have more money to spend. After all, it feels like it will be relatively easy to get more.
• And that means risking excessive inflation: All that excess money can lead to an increase in the price of goods.

How long do bull markets last?

No two bull markets are the same, but they last around 2.7 years on average. This is much longer than bear markets, which tend to last 9.7 months on average.

As the old saying goes, bull markets don't die of old age. They die when the market has changed fundamentally, when prices have risen too high or too fast, or when some other event deflates investor confidence in the market.

Because it's impossible to tell when a market has reached its top from a ground-level perspective, it's very difficult to foresee the turning point before you are in it. Of course, that doesn't stop investors from trying.

"Markets move quickly. Historically we've seen markets move as much as 9 or 10% in one day," says Bailey.

The length of any given bull market is informed by the factors of its time — a concept made clear if you take a moment to examine some of the biggest bull markets in history:

Post-World War II Rally: June 1949 to August 1956

In these prime post-war years, the S&P 500 rose 267% over 86 months, which works out to a commendable annualized return of 20%. On the home front, consumer goods to fuel the Baby Boom were the main driver, while a strong export market also helped companies grow. The Federal Reserve raising interest rates and international tension brought this bull's run to a stop, beginning a bear market phase. However, the market was back in bull territory by 1957.

The Housing Boom: October 2002 to October 2007

The Housing Bubble — a dramatic growth in the real estate sector — began after the federal government deeply cut interest rates in hopes of encouraging investment. The financial institutions that encouraged home financing, real estate investing, and trading in mortgages did extremely well — until interest rates started to climb again, and subprime borrowers started to default on their loans, leading to the subprime mortgage crisis. The bull market ended in early October 2007 as stocks hit their peak, marking the start of a recession. A bear market arrived the following summer.

The Longest Bull Run in History: March 2009 to March 2020

This record-breaking bull market lasted 131.4 months (nearly 11 years), making it the longest in history. After taking a beating during the Great Recession (2007 to 2009), the S&P 500 gained over 400% after a low of 666 points on March 6, 2009. On February 12, 2020, the Dow Jones Industrial Average reached a record high of 29,551 points. The gains for the S&P alone amounted to over $18 trillion on paper, and during the period unemployment was at a 40-year low, at under 4%.

But just a month later, on March 11, the Dow lost over 20% of its value, falling to under 19,000. The S&P 500 and the Nasdaq were pounded soon after. The most obvious cause? Widespread fears over economic and social damage brought by the global spread of the new Coronavirus, as businesses shuttered and millions of people were thrown out of work.

How to invest in a bull market

Wondering how prudent investors act in a bull market? Here are some tips:

1. Don't try to time the market

It's almost impossible to tell when the market is at its peak, and even professionals rarely manage to call it right. Not only is it possible that you sell too late — but you might also end up selling way too early, missing out on future profits. Better to enter and leave the market gradually, without drama — or according to your own preset benchmarks — rather than selling all at once because you're convinced the market has reached its top.

Depending on your financial goals, you're investing strategy can change.

"There are a lot talking heads in the marketplace that speculate and it's very difficult to follow speculative advice if you don't necessarily have an idea of what it is you'd like to accomplish," says Nwasike.

If you follow a buying strategy like dollar-cost averaging, stick to it.

"Dollar cost averaging means with each paycheck, the same dollar amount is used to buy shares. But the process of those shares will change over time. Some days you will buy when prices are high and some days when prices are low," says Bailey.

2. Stay diversified.

It can be tempting to go all-in on a hot stock or sector when the market has been growing, but the end may be closer than you think. If you've only bought the biggest so-called winners, you may find that their pumped-up prices evaporate the quickest.

"Always diversify," says Nwasike. "I would recommend for anyone that wants to do it themselves, diversify your portfolio as the first strategy. And then, monitor regularly. Every 30 days, look at your positions and rebalance how much money you have invested in each of those asset classes."

A super-strong bull market can make even weak companies appear like sure things — until they aren't. Be sure you know what it means to diversify effectively, and keep in mind that knee-jerk reactions to news about individual stocks or companies aren't the best way to figure out where to invest.

3. Pay attention to the all-mighty consumer

Companies that sell products directly to consumers (as opposed to industrials) have proven themselves over decades. Bull markets in recent years have tended to be powered by such companies, but more importantly, they may be a decent safe harbor during downturns as well. Consider investing in these equities, or in a large-cap mutual fund with such stalwarts.

Investing in a bull market

It's impossible to predict exactly when a bull market will end. But it always does, after an external force affects investors' feelings about the future and stock prices start to look too pricey.

Despite the inevitable dips, over an extended time horizon, the stock market has never failed to rise. So not being invested in the market means missing out over the long haul. Like a savvy matador, individual investors should keep an eye on the bull's moves, and adjust accordingly — but always stay focused on their overall strategy and goals.