Understanding Bull Markets: Essential Insights, Key Characteristics

Key takeaway

Empirically, a bull stock market is an advance of 20% or more in an index or stock, often resulting in new all-time highs. A bull run in stock markets is usually accompanied by positive investor sentiment, an expanding economy, and an increase in risk appetite.

Understanding bull markets

What is a bull market? For most investors, this is good news: Stocks are going up. Bull markets elevate investor sentiment and often (but not always) coincide with improving economic data. They vary in length but can often last for years.

Causes of bull markets

• GDP expanding
• Low unemployment
• Technological advances
• Falling interest rates

Characteristics of bull markets

• Historic highs for stock indices
• Increase in retail sales
• Positive investor sentiment
• Rotation towards riskier market sectors

Anatomy of a bull market

To truly define a bull market, we will need to discuss investor sentiment. Investor sentiment tends to flow similarly during bull runs, starting with institutional investors and moving through the media to retail investors.

Several factors can improve investor sentiment during bull markets, such as improving economic data, declining inflation, or lower interest rates. Bull markets can take years to pass through market participants before capital runs out or the economy stumbles.

Examples of historical bull markets

Here are some famous bull markets in the United States from the last 100 years:

The Roaring Twenties

The bull market that preceded the Great Depression saw incredible wealth creation and cultural expansion. Jazz was born, women gained suffrage, and the economy roared for nearly a decade until the crash of 1929.

Dot Com Boom

Technology stocks soared to unprecedented heights with the birth of the Internet in the early 1990s. By 2000, the NASDAQ had gained over 800% in about 5 years, creating a speculative bubble that few markets had seen before.

Post-GFC bull market

Stocks suffered in ways not seen since the Great Depression of 2009, but one of the longest bull markets in history soon followed. The S&P 500 Index has gone more than 9 years without a 20% decline and has posted positive returns for six consecutive years.

Key Factors Behind Bull Markets

Bull markets share specific characteristics, but each is driven by different factors. For example, the bull market following the Great Recession was aided by loose monetary policy, as interest rates were near zero until 2017. However, rates were above 5% during the Dot Com boom, and investors they couldn’t get enough of tech stocks. .

Since no two bull markets are the same, let’s break down all the potential drivers and factors:

• Fiscal policy: When Congress authorized the Treasury to send Economic Impact Payments to Americans during COVID, that was an example of fiscal policy. Fiscal policy arises from spending or taxing Congress.
• Monetary policy: The action of the Federal Reserve is called monetary policy, which results from adjustments in interest rates and open market operations. A great way to differentiate fiscal policy from monetary policy is to think of fiscal policy as targeting demand while monetary policy is targeting supply.
• Technological innovation: Exuberant investors often reward disruptive technology. And while the Dot Com bubble was filled with hubris, the rise of the Internet was truly a world-changing event. From the printing press to the assembly line to the iPhone, innovation that moves the economy forward can often be what defines a bull market.
• Geopolitical stability: Tensions between nations can often disrupt markets. For example, Russia’s invasion of Ukraine in 2022 sent oil prices skyrocketing for several weeks as supply concerns spilled over onto the world stage.

Investment strategies for bull markets

Investors can get FOMO during bull markets, often to their detriment. When times are good, ignoring risk tolerance rules and getting bolder with your investments is easier. But the bull market never lasts forever, and unless you are an elite market expert, you need strategies to work in both bull and bear markets. Here are some to consider when market averages are rising:

• Investing in growth – During bull markets, value stocks are the Rodney Dangerfields of the stock market: they get no respect. Bull markets create the conditions in which growth stocks thrive as investors are willing to give up current profits for future promises.
• Momentum trading – Using a momentum strategy is a popular bull trading technique as volatile stocks often create profitable opportunities. Technical tools such as moving averages, support and resistance, and oscillators such as the Relative Strength Index (RSI) can be useful when riding the waves of bull market momentum.
• Sector rotation – When sentiment is high, investors look for bullish stocks, such as sectors such as technology and consumer discretionary. Investors abandon safer sectors such as utilities and consumer staples when indices rise and vice versa during bear markets.

Risks and challenges in bull markets

A stock market bull can become complacent over time, ignoring warning signals in search of higher profits. This isn’t to say you should invest timidly, but understanding risk means having rules to prevent portfolio disaster. After all, what is a bull market without some compliant participants?

Here’s an example: Many investors are currently overweight in the technology sector thanks to the incredible gains made by the semiconductor sector. Companies like it NVIDIA Corp. (NASDAQ: NVDA) they have high valuations, but how do you know when to sell? Instead of looking for market signals, consider selling shares of any stock that grows above 30% of your portfolio. The rules create diversified portfolios and prevent investors from panic selling during downturns.

How to Profit from a Bull Market

Here are some ways to maximize returns during a bull stock market:

Evaluate the risk level of your portfolio

Is your portfolio too conservative for a bull run? You shouldn’t jump into volatile tech stocks, but too little risk can leave your portfolio underperforming.

Rotate resource allocation

If you feel your risk level is lacking, consider a sector rotation. During bull periods, growth-focused sectors often outperform.

Don’t time the market

Trying to spot the market highs and lows is a fool’s errand. Market timing is one of the worst ways to mismanage a portfolio, and emotions often get the better of investors who don’t have a rules-based plan.

Bull markets are exuberant times, but don’t ignore the risk

All-time market highs characterize a bull market, an expanding economy, and improving investor sentiment. However, bull markets are no excuse to throw caution to the wind and buy all the hot stocks profiled on CNBC. Be sure to reevaluate your goals during bull markets to avoid any “irrational exuberance.”

Frequent questions

What does bull market mean? Here’s a quick answer and some frequently asked questions.