What Is a Bull Market? Characteristics and Historic Bull Markets
What Is a Bull Market?
In the financial markets, such as stocks, when prices have generally been increasing or are expected to increase, a bull market exists. Bull markets commonly refer to the stock market but can be applied to anything that is traded, such as bonds, real estate, currencies, and commodities. Bull markets may be evident during periods of economic growth when GDP rises and unemployment falls, and can exist over extended periods where equity prices rise over months or years.
Characteristics of a Bull Market
Bull markets generally start when the economy is strong. They tend to coincide with a strong gross domestic product (GDP), a drop in unemployment, and a rise in corporate profits. Growing investor confidence can keep bull markets moving. The overall demand for stocks is positive, along with the overall tone of the market. However, supply and demand for securities can vary with supply weak while demand is strong.
It is difficult to predict consistently when trends in the market might change. No metric identifies a bull market, but the most common gauge used is a 20% or more rise in stock prices from recent lows.
Analysts and investors commonly observe the following during a bull market:
- An increase in trading volume, as more investors buy and hold securities to realize capital gains.
- Securities may receive higher valuations due to the perceived potential for price appreciation.
- There’s greater liquidity in the market, as there is more demand for securities and fewer sellers.
- Companies performing well in a bull market may reward their shareholders by increasing dividends.
- Initial public offerings (IPOs) may increase.
Trading Strategies
- Buy and hold: Investors buy a particular security and hold it, hoping to sell it at a later date when prices have moved higher. The optimism that’s a hallmark of bull markets helps to fuel the buy-and-hold approach.
- Increased buy and hold: A variation of the straightforward buy-and-hold strategy, which involves additional risk. An investor will continue to add to their holdings in a particular security so long as that security continues to increase in price. Individuals may increase their position by buying a fixed quantity of shares with every pre-determined increase in the stock price.
- Retracement additions: A retracement is a brief reversal in the general upward trend of a security’s price. Even during a bull market, it’s unlikely that stock prices will only ascend. Some investors watch for retracements within a bull market and buy the dip.
- Full swing trading: Perhaps the most aggressive way of attempting to capitalize on a bull market is the process known as full swing trading. Investors may employ short-selling and other techniques to squeeze out maximum gains.
Historic Bull Markets
- The Roaring Twenties: This bull market occurred in the 1920s, was fueled by speculation, and lasted until the stock market crash of 1929.
- The Reagan bull market of the 1980s: In the 1980s, the stock market experienced a bull market accelerated by the economic policies of the Reagan administration. This bull market lasted over twelve years and ended with the Black Monday stock market crash in October 1987, which saw the S&P 500 index decline by over 20% in a single day.
- The 1990s bull market: Known as the dot-com bubble, this market was driven by the rapid growth of the internet and technology sectors. It lasted from the early 1990s until the early 2000s.
- The 2009 bull market: This bull market began in March 2009 and lasted until February 2020, making it the longest bull market in history.
What Is the Difference Between a Bull Market and a Bear Market?
The opposite of a bull market is a bear market, which is characterized by falling prices and investor pessimism. Bull and bear markets often coincide with the economic cycle, which consists of four phases: expansion, peak, contraction, and trough. The onset of a bull market is often a leading indicator of economic expansion. Bear markets usually begin before economic contraction.
What Is the Bottom and Peak in Trading?
Investors take advantage of rising prices and sell stocks when they’ve reached their peak, or highest price. It is hard to determine when the bottom and peak will take place. Most losses result when investors miss the bottom or top.
What Are Some Economic Indicators of a Strong Economy?
In the U.S., low unemployment, high GDP, increased production, and increased consumer spending are all economic indicators that point to a strong or strengthening economy.
The Bottom Line
A bull market is a trend in a financial market characterized by rising prices and investor optimism. It can occur in the stock market as well as the bond, real estate, currency, and commodity markets. Bull markets may last for extended periods and are marked by increased demand for securities, rising corporate profits and GDP, and declining unemployment. The opposite of a bull market is a bear market, which is characterized by falling prices and investor pessimism.
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