What is a Bull Market?

This article includes links which we may receive compensation for if you click, at no cost to you.

As you invest in the stock market, you’re going to face economic cycles that rise and fall over time. Unfortunately, these fluctuations can be impossible to predict and challenging to work through.

Market changes can make it very hard to stay the course and make sound investment decisions. When the Dow Jones Industrial Average (DJIA) tanks quickly, it can be very tempting to sell to avoid additional losses, for example.

Truth be told, it’s perfectly normal for the stock market and individual sectors to have upswings and downswings. These changes largely center around economic issues and news events, though sometimes it might seem there’s no particular reason at all.

ANSWER: When a market follows a consistent upswing for an extended period of time, it’s called a bull market.

Conversely, an extended downturn is called a bear market.

This piece explores what a bull market is and how you should respond to one as an investor.

Why Bull and Bear Markets Occur

Bull markets typically happen when the economy is strong and there is widespread investor confidence about spending. This, in turn, leads to stronger corporate profits and higher stock prices. Two factors that typically drive bull markets are low unemployment and gross domestic product (GDP) growth.

Bull markets can last anywhere from a few months to several years. For example, we recently experienced the longest bull market in history, which began in March 2009 following the 2008 financial crisis and lasted until March 2020 with the outbreak of the COVID-19 pandemic. During that time, the S&P 500 rose by roughly 330%, and everyone on Wall Street was ecstatic!

On the other hand, bear markets tend to occur when the economy is weak or sluggish due to low employment and low productivity. These factors typically cause business profits to drop, which weaken investor confidence and cause them to rethink asset allocation.

As an investor, there is no point in stressing about market fluctuations — especially because the economy and stock market are not always aligned. Much like the weather, you can’t control when fluctuations in either direction will happen. And it’s a sucker’s game to try to predict them.

As the legendary investor Peter Lynch said, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”

That advice aside, you can plan ahead and prepare yourself so that you’re in a position to capitalize on both accordingly.

How to Maximize a Bull Market

One common strategy that investors use in a bull market is to buy stocks as early as possible when it’s clear that a bull market is occurring.

What you do next depends largely on your long-term investing strategy. Many investors set their sights on holding stocks as long as possible and selling them when they reach their peak. However, this requires timing the market — which is next to impossible.

For the best results, think long-term with stocks and consider adding defensive stocks to your portfolio.

In case you’re unfamiliar, defensive stocks experience minimal fluctuations in value regardless of the overall economic climate. Defensive stocks typically come from organizations that offer products or services that consumers buy regardless of how the environment is doing — like utilities and household necessities (think companies like Unilever and Procter & Gamble).

Here are some additional tips to consider when investing in financial markets during a bull run.

Learn More:

Do a Gut Check

First things first: Take a hard look at your portfolio and perform an inventory assessment. Analyze your time horizon for specific investments and make sure your strategy is aligned with your cash flow and risk tolerance.

Think about How Consumers Are Going to Spend

One way to make money when emerging from a bear market is to think about which industries were impacted by the downturn (e.g., real estate or tech stocks). Keep an eye on industries that are bound to come back strong.

For example, you may want to look into automobiles and industrial equipment, which typically fare well in bull markets because consumers have more disposable income.

Look for Retroactive Opportunities

Consider buying securities when they retract in value. For example, some ETFs or mutual funds might tank all of a sudden and then spike again during a bull run — providing a good opportunity to buy at a lower price and then hold onto that stock until it reaches its true peak.

Have an End Game

The time to prepare for a bear run is when a bull run is ending. Start anticipating changes as a bull market matures and form a plan to help transition your investment strategy into the new economic climate. Rebalance your portfolio and consider buying into emerging markets that are commodity-based.

But remember — timing the market isn’t going to work. Millions and millions dollars have been lost by investors who try to time the market and selling shares too early. Consider a strategy of finding great long-term companies that you think have bright futures, regardless of the condition of the broader market.

Bull Market Pitfalls to Avoid

Bull Trap

A bull trap — or a whipsaw pattern — is a temporary market reversal that causes investors to think that a market is trending up when in fact it’s moving in the opposite direction.

For example, you may notice the Nasdaq starts to move upward, causing you to dump money into an index fund that tracks it — only to watch as the market tumbles significantly lower. In this case, waiting longer would have allowed you to buy into the major stock market index at a lower price point.

A bear trap can also occur when investors think the market is going down and it moves up. While some people try to use technical analysis to try to outsmart the market and avoid traps, many others find success in simply buying great companies and holding through all the ups and downs.

Overconfidence

When the stock market is in the middle of a bull run, it’s much easier to make money. When everything’s going up, everyone feels like an investing genius. Bull markets also tend to favor risk-takers seeking growth. Just because a stock hit a recent high doesn’t mean it can’t go even higher.

Oftentimes in bull markets, investors will undervalue funds with long-term records in favor of riskier, short-term investments with higher immediate potential. To avoid this pitfall, look deeper into companies to see how they perform through various market conditions.

Following the Crowd

Bull markets can bring out the worst in investors, causing people to blindly follow stock advice without taking the time to think decisions through. People who rush in and take stock tips in hopes of getting rich usually feel the brunt of a downturn when things go south in the market.

Sometimes this is by design. Some unscrupulous investors and companies try to take advantage of FOMO (fear of missing out) investors in ploys called pump-and-dump schemes. They’ll buy shares of a little-known stock, hype it up in social media and elsewhere, convince suckers to buy in and raise the price, then sell their shares and leave the naive investors holding the bag.

Try to resist impulse buying during a bull run and think through decisions whenever someone gives you advice. Limit the stocks you buy and prioritize putting your money into companies that you know and trust.

Overpaying

Bullish investors sometimes risk overpaying for stocks when market conditions are favorable while ignoring some telltale signs that suggest a company may not be worth it.

Look deep into a company’s metrics, and compare how a company’s stock price is trading compared to its estimated earnings for the year ahead.

If a company’s shares are trading well above the price-to-earnings ratio for the overall market, think twice about whether that company is going to continue to climb or whether it’s already peaked in value. The P/E ratio isn’t failproof, but it can give you a sense of whether a company’s valuation is overheated.

Frequently Asked Questions

What does it mean to act bullish?

An investor is said to act bullish if they think that a stock is going to increase in value. For example, an investor may analyze the market and like what they see in a company such as Tesla ($TSLA) or Amazon ($AMZN), causing them to invest in one of those companies. In this case, that investor would be acting bullishly.

How long do bull runs last?

Bull runs tend to last roughly four years on average, but they can vary widely. This is why it’s important to think long-term when investing and avoid making hasty decisions that only benefit you during bull runs. All bull runs eventually come to an end — just like bear runs do.

How do you know if you’re in a bull market?

The general rule of thumb signaling a bull market is when the S&P 500 has increased by 20% after a previous dip of at least 20%. However, there is no universal rule signifying when markets change.

Should you buy or sell in a bull market?

If you are looking to make gains in a bullish market, the best thing to do is buy securities at the beginning of the run and sell them at peak value. Easier said than done.

One piece of advice to consider though is buying stakes in companies that you never have to worry about selling. Emotions tend to run high for investors during bull runs as people look to maximize their earnings and cash out on high-value stocks. But this is not always the best approach.

As an investor, you’re hopefully going to be around a lot longer than the four-year bull run. You should be paying more attention to how your stocks are going to fare two or three decades down the line — not in short-term intervals.

What’s the best way to prepare for a bear market?

If you’re young, most advisors will generally tell you to hold onto your stocks and keep moving forward with the stock market regardless of whether you’re in a bear market or bull market.

There are strategies that you can use to make money in both cases. Getting spooked during a bear market and pulling out before it turns bullish can have terrible consequences for your portfolio. In fact, many investors see bear markets as buying opportunities when shares of companies they like go on sale.

If you’re uncertain, you might want to talk with a financial advisor who can give you further tips and strategies for getting through a bear market and maximizing buying opportunities. In fact, if you play your cards right, you can make a lot of money during bear markets.

Is a bear market dangerous for investors?

The stock market is risky regardless of when you invest. However, a bear market tends to be riskier for investors because equities lose value.

Oftentimes, investors pull assets out of the stock market out of fear they will continue to drop. However, this is also a risky move that could make it harder to gain a strong foothold when the market becomes bullish again. After all, you don’t lock in losses until you sell.

Is it a good idea to time the market?

Timing the market is generally not a good idea. This is because the stock market operates independently of the economy, meaning economic data doesn’t determine stock prices. The economy can sometimes influence the stock market, but the two are not connected.

In short, economic data is based on the past while stock prices are projected around future earnings. Make decisions based on what’s currently happening and what’s likely to happen instead of reacting to economic reports. And above all else, buy companies because of their merits instead of their stock prices.

That’s not to say you should ignore what’s happening in the economy — far from it. Just keep in mind that the economy can be deceiving.

What is a secular bull market?

A secular bull market occurs when a long-term trend line moves upwards for many years, causing the S&P 500 price to remain above that trend.

What is a market correction?

A market correction is generally defined as when a market decline is greater than 10% but less than 20%. It happens when a market or asset becomes overinflated and stock prices fall.

The Bottom Line

The only way to survive in the stock market is to get comfortable investing in bear and bull markets. Focus on building a stable and diversified portfolio — and put yourself in a position to capitalize on market conditions when they change.

As famous investor John Templeton once said, there will always be bull markets followed by bear markets followed by bull markets.

In other words, bullish and bearish trends never last forever, and the best thing you can do is to remain nimble and prepared for changes when they occur.

Here’s to forming a strategy that helps you succeed in the most bullish and bearish of times!

Leave a Reply

Your email address will not be published. Required fields are marked *

In This Article