What is a Bull Market?

A bull market is a time when stock prices keep going up for months or years. People feel good about the economy during a bull market. They have jobs and make money. Companies also make a lot of money. This makes people want to buy stocks. More people buying stocks pushes prices up even more.

A few things make a bull market happen:

• Low inflation: Prices for food, gas, and other things people buy don’t go up too fast
• Low interest rates: It doesn’t cost too much to borrow money from banks
• Strong consumer confidence: People feel good about the economy, their jobs, and spending money
• Growing corporate earnings: Companies are making more and more profits

When all these things happen together, it often leads to a bull market in stocks. People feel optimistic and excited about the future. They invest more money in the stock market. This drives up stock prices and market indexes like the S&P 500 and Dow Jones Industrial Average.

Anatomy of a Bull Market

Most bull markets go through four phases:

1. Accumulation phase: Stocks start going up after a big market bottom. Investors see value and start buying beaten-up shares.
2. Participation or consolidation phase: Prices continue rising as more investors notice and start buying in. The economy improves.
3. Euphoria or late-stage phase: Optimism spreads and almost everyone buys stocks. Prices rocket higher. Some call this “irrational exuberance.”
4. Blow-off or excess phase: Stock valuations get too high compared to earnings. Smart investors start taking profits. A crash or bear market could be next.

A bull market usually lasts several years but can be as short as a few months. The longest bull market in history ran for 11 years from 2009 to 2020. The shortest was just 2 and a half months in 1932.

Investing in a Bull Market

Many people try to time the market and jump in early in a new bull market. But this is very hard to do. It’s easier to just invest consistently over time and hold through the cycles. Buying stocks regularly, like every month, smoothes out your cost.

In a bull market, buying and holding a diversified portfolio of stocks or index funds can work very well. With low inflation and interest rates, corporate earnings usually keep rising. This drives stock prices higher over time.

However, it’s important not to get too greedy or caught up in the euphoria of a late-stage bull market. When people start quitting jobs to day-trade or buying stocks on margin, it could signal a peak. Smart investors take some profits when valuations get extended. Having some cash on the sidelines lets you buy the dip if a bear market hits.

Types of Bull Markets

Bull markets can happen in different types of assets, not just stocks:

Secular vs. Cyclical Bull Markets

A secular bull market is a long-term uptrend that can last a decade or more. It’s driven by fundamental economic changes and can weather smaller corrections. The U.S. stock market was in a secular bull from 1982 to 2000.

A cyclical bull market is shorter, lasting maybe a few years within a longer-term bear market or sideways trend. These bulls follow the normal economic cycle of expansion and contraction. The rally from 2003 to 2007 was a cyclical bull within the 2000-2013 secular bear market.

Commodity Bull Markets

Commodities like oil, gold, copper, etc. can also have bull markets. These often happen with a weakening U.S. dollar or rising inflation. Gold went through a huge bull market in the 1970s as inflation surged. Oil prices spiked in the mid-2000s on rising demand from China and other emerging markets.

Bond Bull Markets

When bond prices rise and yields fall, you have a bond bull market. This can happen in a slowing economy when the Fed cuts interest rates. Money flows out of stocks and into bonds, driving up prices. The U.S. has been in a bond bull market since the 1980s as rates fell from double-digit highs to record lows.

What Makes a Bull Market End?

Bull markets eventually die out and turn into bears. A few things can kill a bull market:

Economic Slowdown

If the economy falls into a recession, corporate profits drop. Investors sell stocks and prices fall. The 2008 Financial Crisis and 2020 COVID crash are good examples. The bull market ends and a bear begins.

Excessive Valuations

In the late stages of a bull market, investors can get carried away. They might pay too much for stocks compared to earnings. The Dot Com bubble in 2000 saw extreme valuations for money-losing tech companies. When the bubble burst, the bull market quickly turned into a brutal bear.

Rising Inflation and Interest Rates

Low inflation and low rates support higher stock valuations. But if inflation spikes, the Fed might hike rates aggressively to cool the economy. Higher rates hurt stock valuations and can choke off a bull market. The 1970s and early 1980s saw inflation run wild, ending a long bull run.

Exogenous Shocks

Sometimes an unexpected event derails a healthy bull market. Think 9/11, a big oil price spike, a trade war, or a pandemic. These sudden shocks can cause stocks to crash, ending the bull. Bull markets climb a wall of worry but they can succumb to an exogenous surprise.