Bull Market, Types, and History
Three Causes of a Stock Bull Market
A bull market is when an investment's price rises over an extended period. The phrase is commonly used when describing securities, such as stocks, bonds, and commodities. But bull markets can also occur in other investments, such as housing.
A bull market lasts until prices have risen for so long investors think they'll always go up. They enter a state of irrational exuberance, bidding prices way above any underlying value. That's an asset bubble. As investor George Soros said, it usually lasts longer than anyone expects. Investors' belief about stock prices influence the prices themselves in a self-fulfilling prophecy.
But inevitably the bubble bursts and prices fall. If they fall 10 percent or less, it creates a market correction. On August 22, 2018, the current bull market became the longest-running in U.S. history.
Bull Versus Bear
A bear market occurs when prices fall 20 percent. Investors' confidence collapses, and they believe prices will continue falling. Most stock bear markets last 18 months or so. They end when prices fall below the asset's underlying value.
Longest Bull Market
In stocks, the longest bull market occurred between 1990 and 2000. It was also the highest-returning, as measured by the S&P 500. Stock prices rose 417 percent during that period. The current bull market is the second-longest, lasting from March 2009 to the present. Its return was 295 percent between its inception to December 2018. The average return of all bull markets since 1932 has been 165 percent.
Types of Bull Markets
Stock: Typically all three major stock market indices 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.
There are three causes that drive a stock bull market.
- Top-line revenue: This should increase as fast as the economy as measured by nominal gross domestic product. That reflects the demand for goods and services from consumers. In past recoveries, it was 7.5 percent, 5.6 percent, and 5.2 percent. Since 2008, it's only grown 3.7 percent on average.
- Profit: This is how much top revenue has generated in profit for the company. On average, for the past 20 years it's been 7.5 percent. In this recovery, it's 9.8 percent, a record. You might think it's good that companies can generate more profit from the same revenue dollar, but it's not. That's because the profit is at the expense of jobs, salary and investments in capital.
- P/E ratio: This is how much in additional stock price that investors are willing to pay for each dollar of earnings. Right now it's around 16.6 times earnings for the S&P 500. That's about 9 percent higher than the average of the past five years.
Gold: On September 5, 2011, gold prices reached an all-time high of $1,895. That was the end of a bull market in gold that started in 2000. Before then, gold usually hovered around $300-$400 an ounce.
Bond: For the past 32 years, bonds have been in a bull market. That means that you wouldn't lose money buying a bond because their rates of return were always positive.
Secular: A secular bull market is a long-term, overarching trend that lasts 5 years to 25 years. A bull market can have a correction, drop 10 percent, 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.
What Is a Market Bull?
A market bull is a someone who thinks that prices are going up. That person is said to be bullish. A market bear is, of course, the opposite. He's the one who thinks prices are going down and is said to be bearish.
Why use a bull or a bear to describe a market trend? It all started in the late 1500s with bull and bear baiting. That's when people watched dogs attack bulls or bears) chained to a post. Bulldogs were bred for this purpose. Spectators bet on whether the bull or dog would win. Bull baiting was so popular that every town in England had its own bull ring. In some towns, events occurred several times a week. Surprisingly, bear baiting still occurs in South Carolina, although it's illegal in the other 49 states.
That's how bears and bulls first became linked in people's minds. Bears were used to describe market behavior in the 17th century. First, people often used the phrase, "Don't sell the bearskin before one has caught the bear," to describe hunters who did exactly that. In the stock market, short sellers did the same thing. They sold shares of stock before they owned them. They bought the shares they day they were to deliver them. If share prices dropped, they would make a profit.
It made sense in people's minds to use bulls to describe the opposite of bears who bet prices would rise. Also, the Germanic root of the word "bull" means "to blow, inflate, or swell," which is what a rising market does.
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. William Holbrook Beard painted the stock market crash of 1873 using bulls and bears. (Sources: "Symbolism of the Bull and Bear," Federal Reserve Banks of New York. "Origin of Bulls and Bears," Motley Fool. "Bulls and Bears," Valentine Capital Asset Management. "The Quirky and Brutal Origins of the Words Bull and Bear," Investing Answers.)