To many people, bull markets are periods of incredible financial success where everything in the markets are up, and there is positivity in the market; for example, when stocks, commodities, ETFs and the S&P 500 index funds are in the black. But is that really what defines a bull market? If not, what is the true definition of a bull market? In this guide, we take you through the definition and characteristics of bull markets. We’ll also discuss causes and examples of bull markets and best practices when in the middle of one.
What is a bull market?
A bull market is a period where the stock markets experience an extended increase in asset prices by over 20% since recent lows. Bull markets typically last anywhere from several months to seven years or more. Since bull markets are pretty difficult to identify until after they’re past, many investors use indices such as the S&P 500 or Dow Jones Industrial Average, gold, and bonds to gauge market performance.
Just like bear markets, there are also different types of bull markets. These include:
- Secular bull markets: Long bull markets that can exceed 25 years. They may also have several bear markets within them.
- Gold bull markets: When gold prices continue to rise for extended periods
- Bonds bull markets: When bonds continue to offer positive returns
- Stock bull markets: When stock markets keep hitting new highs and higher lows
So what are the features of a bull market?
Characteristics of a Bull Market
Here is what a bull market can constitute:
- A robust economy. The bullish market trend usually indicates a booming economy. Besides a growing GDP, the market growth supports increased employment rates and spreads development to other sectors. More companies reinvest their profits, increase their workforce, and diversify into other market segments. Also, people have more disposable income and higher spending power.
- Increase in market performance. Skyrocketing stock prices are also a clear sign of bull markets. When the stock prices rise by 20%, you’ll also likely notice it with index funds like the DJIA or the S&P 500.
- Increased risk-seeking habits. A bullish market trend is usually ideal for investors looking to take more risk in their portfolios. Bull markets can give favourable returns on investment. Many investors will be willing to buy more shares, diversify their portfolios and invest in new and upcoming markets.
- Increased Initial Public Offering (IPO). With improved investor confidence, companies and businesses could start to consider IPOs and seek seed funding.
Causes of a bull market
It’s hard to predict a bull market because the improvement can be subtle. However, here’s how you can tell you entered a bullish trend.
- Low-interest rates. Bull markets attract low-interest rates. Now, investors can take on more debt from financial institutions and increase their capital. Experienced investors can also use prevailing interest rates to take more risks and increase their potential returns, with larger trading positions.
- Supply deficits. As companies hire more workers, earnings improve, leading to better spending habits and increased demand. That may lead to a strain in the supply chain as companies strive to meet the market demand for newer and better products.
- Free trade agreements. Bullish markets attract new trading partners. They also cut down the cost of trades which leads to waived tariffs and lifted sanctions. That allows countries and regions to trade freely with fewer restrictions.
- Stable economic growth. Stable economic growth leads to increased income for workers, and more disposable income. As consumers enjoy increases in disposable income, investors and traders can also be taking on more risk.
Examples of Historic bull markets
There have been plenty of exciting bullish markets in the recent past. Let’s look at some of them.
- The 2009 Bull Market. The 2009 bull run lasted for a record-breaking 11-year period up to early 2020, shortly before the COVID-19 pandemic hit. There was steady and continuous growth in all the markets, including stocks, commodities, real estate, energy, and health. Some of its drivers included cryptocurrencies, Bitcoin technology, electric cars, and positive company earnings. Also, this period had some of the lowest federal interest rates. Factors like corporate tax cuts from the previous 35% downwards to around 20% also significantly sustained the bull market. Companies like Apple (AAPL) saw their stock prices surge more than 1000%, while major index funds like the S&P 500 and DJIA surpassed 170%.
- The 1990 Bull Market. The tech era’s bull market driver was the speculation of the dot-com bubble, which lasted about 7 to 10 years. Since technology was still a new concept, most investors allocated their capital to any tech company that could increase their earnings. Companies like Amazon, Yahoo, Microsoft, and Qualcomm contributed much to the dot-com bull market. The S&P 500 climbed by 417%, giving investors great investment returns.
- The Regan Bull Market(1980). The main driver of the Regan bull market was the signing of the $98.3 billion tax bill. Towards the end of 1982, the DJIA and S&P 500 ascended as investors continued to buy shares of companies. Also, the suggestion by then-president of the US, Ronald Regan, to lower interest rates and stir economic growth, further increased market speculation. By mid-August 1982, the New York Stock Exchange(NYSE) reached trading volumes of over 400 million weekly shares.
- The Japanese Bull Market(1980s). During their bull run, Japan became a global giant in many areas, including technology, real estate, entertainment, and more. Japan offered a far better return on investment than the US stocks and index funds. In the 1980s, the Nikkei Index Fund did four times more than the S&P 500. At the time, Nikkei rallied at 900%, making it double the size of the S&P 500 within five years. The drivers of the Japanese bull market were industrialisation and real estate valuation. For example, Mitsubishi did so well that it bought the Rockefeller Center in New York. The bull market ended in the 90s, with a crash double that of the U.S. housing bubble and dot-com bubble.
Taking advantage of Bull Markets
Since Bull markets are harder to predict, they may be harder to take advantage of. There are some things you may consider if you anticipate you may be in a bull market:
- Watch Price Drops. Although bullish means an upwards trend in prices, there are moments when stock market prices drop, before rallying again. You could find an opportunity to purchase assets and diversify your portfolio quickly during these small dips. Once prices rally and stabilise, you may take your upside from narrow price jumps or enjoy long-term returns by going long.
- Diversify your portfolio. A bull market makes a great time for you to diversify your holdings. When the market prices show good growth, capitalise on this uptrend and consider spreading your eggs in multiple baskets. Diversification can help you take full advantage of various market opportunities.
- Buy and hold. Since there is exuberance in the markets and positive investor sentiment during a bull run, you can look to buy and hold as many assets as you can, according to your trading plan. After that, you can consider selling for profits when the prices rally again.
- Full swing trading. Swing trading is one of many ways to capitalise on brief price movements in a bullish market. In swing trading, traders enter positions when the market prices fluctuate and take advantage of price volatility.
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