What is a Bull Market?

by | Apr 12, 2023 | Research

In many cases, understanding the movements of financial markets is critical to making wise investing decisions. But jargon can be a significant barrier to interpreting market news. By learning this terminology, you can better understand information from media, market pundits, and your wealth manager.

One common term in the finance world is “bull market.” If you understand this phrase, you can tailor your financial decisions to make the most of the market condition it represents.

What is a bull market?

“Bull market” is a term used by investors to describe a sustained period of buying and price growth in a particular market or sector. There is no official body that has established formal criteria to define a bull market. However, a generally accepted indicator is a steady rise of about 20% in market value that is maintained for at least two months.

Bull Market definition: a term used by investors to describe a sustained period of buying and price growth in a particular market or sector.

Conversely, a “bear market” occurs when the value of a broad index falls by 20% or more and sustains those losses for at least two months. However, the terms “bull and bear market” can also be used more generally to describe a period of stock price growth or contraction.

In addition to the terms “bull and bear market” you may also hear investors or pundits described in relation to these two animals. Often, an optimistic investor is described as “a bull” or as having a “bullish outlook.”

What is a bullish outlook?

An investor with a “bullish” outlook anticipates higher stock prices in the future. This term originates from the phrase “bull market” since investors with a positive outlook typically predict a bull market. On the other hand, a “bearish” outlook would describe someone who anticipates lower stock prices in the future.

Bullish and Bearish definitions. Bullish: an investor who believes markets will trend up. Bearish: an investor who believes markets will trend down.

Catalysts of Bull Markets

There have been many bull markets in American history and these periods tend to share some key characteristics. Often, a strong stock market coincides with a strong economy. So, some of the factors typically present during a bull market include:

Strong Economic Growth

Economic growth is one of the most important factors typically present during a bull market. People tend to spend more when the economy is growing, which leads to higher sales for businesses. With higher sales, profitability and stock prices tend to increase.

Stable or Declining Interest Rates

Reductions in interest rates are often intended to spur the economy, but they can also promote higher stock prices. When businesses pay less for financing, their profitability can reflect those lower costs. Additionally, when consumers pay less to borrow, they tend to have more cash to spend which leads to higher sales for some businesses. Finally, some growth stocks are valued using a formula that relies on the risk-free rate – typically the 3-month Treasury yield. When that rate falls, stock valuations tend to rise.

While declining interest rates can have a positive impact on stocks, a long period of relatively stable interest rates can also promote a bull market. For example, from 2009 to 2020, interest rates remained mostly stable, and relatively low. During this time, the S&P 500 experienced the longest bull market in history.

Investor Optimism

The trajectory of stock prices depends on more than just economic data. It is also influenced by investor behavior. When investors are bullish, they tend to invest more in hopes of making a profit. This increased demand for stocks can drive their prices higher.

The economy and stock prices are often closely related. When spending is robust, business profits tend to rise – often fueling a strong stock market. But how does this information impact your investing decisions?

Investing During a Bull Market

Investing tends to be easier, in general, during a bull market. When stock prices are rising across the board, it’s less likely that an investor will choose a loser. However, even in the strongest bull market there are opportunities to lose your investment or even to earn higher returns than the market averages. For this reason, your investing decisions should be made with your personal goals, situation, and risk tolerance in mind.

An experienced wealth manager can help you quantify your goals and build a portfolio to achieve them. Certain advisors can even create a portfolio that is designed to capitalize on current market conditions while maintaining protection against future market declines. You may be surprised to learn that this level of customization is no longer reserved only for the very wealthy.

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Article Topics: Financial Planning | Stocks