A bull market is a prolonged period in the stock market when investment prices are rising faster than average. In a bull market, investor confidence and investment increases. Bull markets generally coincide with periods of robust economic growth, when people are more attracted to the stock market due to higher earnings. However, bull markets can create "bubbles" where prices rise much higher than the value of the underlying asset.
Different market sectors can experience bull markets at different times, including bonds, commodities, futures and foreign exchange markets. Bull markets occur when the demand for a security or group of securities outweighs the usual laws of supply and demand, pushing prices higher. A market is commonly considered to be bullish when at least 80 percent of all stock prices rise over an extended period. Another indicator is if market indexes rise at least 15 percent.
Turning belief into reality
Arguably, rising investor confidence is the foremost indicator of a bull market. If investors believe a bull market will happen, their actions will often turn their beliefs into a reality. Investor sentiment is often shown in put/call ratios, advance/decline lines, IPO activity, and the amount of outstanding margin debt.
Bull markets occur in four distinct phases.
- The first phase starts with low prices, low investor sentiment, and pessimistic views about future prices.
- In the second phase, trading activity, stock prices, and corporate earnings start to increase, bringing economic indicators above average. Investors also become more optimistic.
- In the third phase, market indexes and securities reach trading highs as trading activity continues to increase and dividend yields reach new lows.
- The final phase is marked by excessive IPO activity, trading activity, and speculation. With stock price/earning ratios at historic highs, investors take profits or react to negative indicators, which in turn unravels the bull market.
The best time for investment is when the bull market is in its infancy, or the first phase. Here are a few tips on investing in a bull market:
- Bargain shop for stocks at the bottom of a bear market.
- Consider the appropriate industry, as some industries are better at rebounding than others.
- Find companies with strong fundamentals, like solid sales and earnings, good products, etc.
- Diversify your portfolio with different stocks and/or mutual funds, as well as nonstick investments like savings bonds and bank accounts.
Origin of term
The term "bull market" is derived from the "bear market," which stems from the bearskin trading market in the 18th century. Because bull and bear fighting was once a popular sport, bulls were considered the opposite of bears. Cartoonist Thomas Nast popularized the bull and bear as symbols of the different types of markets.
Metaphorically, the term "bull" symbolizes the way bulls attack, by thrusting their horns out and up, resembling the upward move of the markets (whereas a bear attacks by swiping down). While this may not be historically accurate, it's a good way to remember that the term "bull market" means the market is going up, or increasing, and "bear market" means the market is going down, or declining.
Three of the biggest bull markets in the history of U.S. equities include:
- 1860-1872 – coincides with the rise of the railroad industry
- 1920-1928 – precedes the Great Depression
- 1982-1999 – precedes the tech bubble burst