JThe stock market, like other tradable asset markets such as commodities and cryptocurrencies, goes through cycles of bull markets and bear markets. These cycles of boom and bust have repeated themselves time and time again throughout history, from events such as the Great Depression and the Tulip Craze to the dotcom bubble and the Great Financial Crisis.
More recently, the COVID-19 pandemic has resulted in one of the most rapid market downturns ever. The market response? A monumental bull run, driven by government stimulus measures. However, the process is endless. The ripple effect facing global economies is increasingly persistent inflationary pressuresmarking the end of the last bull market.
To understand stock market cycles, it is important to know how bull markets work.
What is a bull market?
The broad definition of a bull market is when an asset rises 20% from its previous lows and begins to maintain a reliable uptrend. Basically, it’s an extended period where the value of assets continues to rise. The associated term “bull” may be related to this relentless forward charge of the price.
This can sometimes be followed by unrealistic expectations that result in asset bubbles where evaluation measures no longer make sense. As a result, sharp declines can occur and bear markets take over.
Bull markets are part of the recurring cycles of economic markets. However, it is nearly impossible for most people to time their moves to match market cyclicality. Bull markets can be good times to make money, but if investors are overexposed, they can face significant declines.
How do bull markets work?
Bull markets are supported by a number of factors. Wage growth, capital inflows, minimal unemployment, high consumer spending and rising corporate profits are all factors that lead to sustained bull runs.
When the opposite occurs, however, markets can experience rapid declines, clouded outlooks, and weaker demand for products or services that cause markets to spiral downward.
How long do bull markets last?
Stock markets had their longest bull run from 2009 to 2020, but this was a historical outlier. It is important to consider this recency bias, as the average duration of a bull market is only 3.8 years.
What are the benefits of bull markets?
The main benefit is favorable asset price appreciation for investors. Average bull market returns are around 112%, which is an attractive opportunity to make money.
Should you buy during a bull market?
Bull markets can be good times to buy, given that the typical return is 112% from start to finish. That said, timing the markets can be extremely difficult. If an individual makes an investment towards the end of a bull run, he could suffer significant losses.
Additionally, it is important to be aware that picking individual stocks will involve much more risk, as it exposes investors to increased volatility. A good strategy to employ is to average the dollar cost in index funds over the lifetime, as historically US indices have continued to break above all-time highs.
Depending on the environment, some sectors tend to perform better than others, so it helps to diversify a portfolio and gain exposure to a wide range of assets.
What is the difference between a bull and a bear market?
Simply put, bull markets correlate with rising asset prices, while bear markets correlate with falling asset prices.
Generally, a bear market is defined as the point where an asset or stock index such as the S&P 500 has fallen more than 20% from its highs. On the other side of the coin is a bull market, where the same defined asset or index fund has gained 20% from its lows.
However, these are loosely used methods of defining general market sentiment.
What causes bull and bear markets?
The most effective leading indicators of bull and bear markets are the current economic conditions. These include factors such as the unemployment rate, consumer spending, debt levels, corporate profits and government stimulus.
When these metrics point to continued and sustainable growth, investor sentiment and consumer confidence will remain positive, supporting a bull market. On the other hand, when things go wrong, consumers temper their future expectations. This can lead to tighter spending habits and lower sales for businesses as uncertainty increases – a bear market.
Bear markets can also be much more sudden than bull markets when a “black swan” event occurs, which refers to unpredictable events. An example of this is COVID-19, where the majority of investors failed to predict consequences such as the spread of the virus and lockdowns sweeping nations around the world.
Do bull markets last longer than bear markets?
While bull markets tend to last almost four years on average, for bear markets the average duration is only 9.6 months.
The number of bull and bear markets throughout stock market history has been more or less equal.
Final take
Bull markets are a natural aspect of financial markets and investing in general. They can be great opportunities for risk-taking investors to earn healthy returns over long periods of time, once risk is managed appropriately.
FAQs
- What defines a bull market?
- A bull market is defined as a period of time when asset prices are rising. Many different financial products can be connected to bull and bear markets, including stocks, cryptocurrencies, and commodities.
- What is a bull market and what causes it?
- Bull markets occur when persistent uptrends in asset prices occur, often driven by positive economic conditions that favor both businesses and consumers.
- What is a bull market trap?
- A bull market trap occurs when the price of an asset rebounds significantly but the rise in price is not sustainable. A reversal will cause the asset to return to the downtrend, where the price may drop significantly lower under certain circumstances.
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What is a bull market?
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