What Is a Bull Market?

Bull Markets Explained

bull statue in the city
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A bull market is the condition of a broad market or a single market in which prices are continuously rising. Investors make money at any price at which they buy an investment because prices generally continue to rise.

The bull market is the type most desired for the majority of investors. If you are new to investing, it helps to understand what drives the bull market in order to take advantage of the opportunities available.

Definition and Examples of a Bull Market

A bull market is the market condition when prices continue to rise. Markets follow two general trends over time. Either prices are in an upswing (increase) or they are in a downswing (decrease).

The upswing or increase indicates a bull market; a bull swipes "up" with its horns to attack.

These were the five longest bull markets since World War II:

  • 1949 to 1956 (86 months)
  • 1974 to 1980 (74 months)
  • 1982 to 1987 (60 months)
  • 1990 to 2000 (113 months)
  • 2009 to 2020 (131 months)

The most recent bull market is the longest in history. It went from 6,594.44 in 2009, to a high of 29,551.42 on February 12, 2020, returning 348%.

How Does a Bull Market Work?

A bull market generally lasts until prices have risen for so long that investors begin to believe that prices will continue going up. Investors' belief about stock prices influence the prices themselves in a self-fulfilling prophecy—a term used in investing that refers to investors creating the market circumstances—which results in higher prices because investors are causing the prices to rise.

Note

Much of the volatility in markets is due to investor sentiment, or how investors in general feel prices are going to swing. World events, the business cycle, and the opinions of investing icons are all examples of factors that influence investors to cause price fluctuations.

When prices fail to fall over time, investors enter a state of irrational exuberance. They begin bidding prices above the actual underlying value, wildly over-valuing the investments. This creates what is known as an asset bubble, where prices rise until the supply of the assets resists any more rise in price. Investors begin to panic and sell; the bubble bursts and prices begin to fall.

If prices fall 10% or less, it is considered to be a market correction. At 20%, the bull market is mourned by investors as the bear market begins. The same percentages are used when prices begin to rise to announce the return of a bull market.

How Bull Markets Compare to Bear Markets

When prices fall over a period of time, that's a bear market. Think of a bear swiping downward with its claws, knocking the market down.

Bull and bear markets are used when describing the trends of securities. These include stocks, bonds, commodities, and other types of investments. Investors can also take a bullish or bearish stance, depending upon their outlook. To be bullish is to believe that an investment's price will rise. To be bearish is to believe that the price will fall.

When the bear market begins, investors' confidence collapses, and they believe prices will continue to fall, further reducing prices. Similar to bull markets, stock bear markets can last for years.

A bull market begins when investors feel that prices will start, then continue, to rise; they then begin buying stocks in the hope that they are right. This belief and the actions that follow cause stock prices to rise again.

Types of Bull Markets

There are several specific types of bull markets to be familiar with.

Stock

Typically all three major stock market indexes rise at the same time. These include the Dow Jones Industrial Average, the S&P 500, and the NASDAQ. A bull market consistently makes higher highs and higher lows. A stock bull market occurs in a healthy economy.

Dividends don't get as much attention during a bull market, yet with yields like these they should.
Bull market after a correction.

There are three causes, in addition to investor sentiments, that drive a stock bull market:

  1. Top-line revenue (TLR): This should increase for companies as fast as the economy grows, as measured by nominal gross domestic product (NGDP)—the output of goods and services using current prices. TLR generally mirrors the demand for goods and services from consumers. In past economic periods of recovery, the NGDP growth rates were 7.5%, 5.6%, and 5.2%. Since 2008, it's only grown by 3.7% on average.
  2. Profit: This is how much top revenue has been generated profit for a company. The average for the past 20 years has been 7.5%. In the period of economic recovery from 2008–March 2020, a 9.8% top revenue record was set. This appears to be good for the economy and consumers when companies can generate more profit from the same revenue dollar. But in truth, it's not. This profit comes at the expense of jobs, salary reductions, and investments in capital.
  3. P/E ratio: The price-to-earnings ratio is the ratio of a stock price for each dollar of earnings per share. Investors tend to monitor the P/E for their investments—as earnings begin to drop, the P/E rises, causing investors to begin selling their holdings.

Gold

On September 5, 2011, gold prices reached a new high of $1,895. This signified the end of a bull market in gold that started in 2000. Before that time, gold usually hovered around $300–$400 an ounce.

Bonds

Bonds have been bullish since the mid-1980s. What this means is that investors have not lost money when buying a bond because their rates of return were always positive. The indexes tracked by the St. Louis Federal Reserve all show positive returns for this period. Some may have come close to zero returns, but none crossed the line.

FREDGraph
Bond Indexes, 30 Years.  Federal Reserve Bank of St. Louis

Secular

A secular bull market is a long-term, overarching trend that lasts five to 25 years. A bull market can experience a market correction, drop 10%, and then resume its upward swing without entering a bear market. A secular bull market can have smaller bear markets within it. These are called primary market trends and happen frequently. 

History of the Terms

It's believed by some that bulls first became synonymous with rising and falling prices when people would place bets on whether dogs could kill a bull chained to a post—called bull-baiting. The bulls would use their horns to defend themselves.

Others believe that bearskins were used to describe market behavior during the 18th century, when dealers in bearskins (known as bearskin jobbers) were reported to have sold bearskins before they were brought in, leading to a proverb that warned: "Don't sell the bearskin before one has caught the bear."

The term bear reportedly became popular in the early 18th century when referring to stocks after a trade company's stocks collapsed after being sold by speculators who didn't own them.

The phrases were first published in the 18th-century book, "Every Man His Own Broker," by Thomas Mortimer. Two 19th century artists made the terms even more popular—Thomas Nast published cartoons about the slaughter of the bulls on Wall Street in Harper's Bazaar, and William Holbrook Beard painted the stock market crash of 1873 using bulls and bears.

Key Takeaways

  • A bull market is the market condition when prices continue to rise and is generally desirable for most investors.
  • The most recent bull market is the longest in history; it went from 6,594.44 in 2009, to 29,551.42, its high on February 12, 2020, returning 348%.
  • In addition to investor sentiments, there are three factors that drive a stock bull market: top-line revenue, profits, and the P/E ratio.