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What is a 'Bull Market'

A bull market is a financial market of a group of securities in which prices are rising or are expected to rise. The term "bull market" is most often used to refer to the stock market but can be applied to anything that is traded, such as bonds, currencies and commodities.

BREAKING DOWN 'Bull Market'

Bull markets are characterized by optimism, investor confidence and expectations that strong results should continue, usually for months or years. It is difficult to predict consistently when the trends in the market might change. Part of the difficulty is that psychological effects and speculation may sometimes play a large role in the markets.

Generally speaking, a bull market happens when (stock) prices rise by 20 percent, usually after a drop of 20 percent and before a 20 percent decline. Since they are difficult to predict, bull markets can typically only be recognized once they’ve happened. 

Characteristics of a Bull Market

Bull markets generally take place when the economy is strengthening or when it is already strong. It happens in line with strong gross domestic product (GDP), and a drop in unemployment and will often coincide with a rise in corporate profits. Investor confidence will also be on the rise. The overall demand for stocks will be positive, along with the overall tone of the market. In addition, there will be a general increase in the amount of IPO activity during bull markets. 

Supply and demand for securities will seesaw: Supply will be weak while demand will be strong. Investors will be eager to buy securities, while few will be willing to sell. In a bull market, investors are more willing to take part in the (stock) market in order to gain profits. Investors who want to benefit from a bull market should buy early in order to take advantage of rising prices and sell them when they’ve reached their peak. Although it is hard to determine when the bottom and peak will take place, most losses will be minimal and are usually temporary. 

Bull vs. Bear Markets

The opposite of a bull market is a bear market, which is characterized by falling prices and typically shrouded in pessimism. The use of "bull" and "bear" to describe markets comes from the way the animals attack their opponents. A bull thrusts its horns up into the air, while a bear swipes its paws downward. These actions are metaphors for the movement of a market. If the trend is up, it's a bull market. If the trend is down, it's a bear market.

Bull and bear markets often coincide with the economic cycle, which consists of four phases: expansion, peak, contraction and trough. The onset of a bull market is often a leading indicator of economic expansion. Because public sentiment about future economic conditions drives stock prices, the market frequently rises even before broader economic measures, such as gross domestic product (GDP) growth, begin to tick up. Likewise, bear markets usually set in before economic contraction takes hold. A look back at a typical U.S. recession reveals a falling stock market several months ahead of GDP decline.

Bull Market Example

The most prolific bull market in modern American history started at the end of the stagflation era in 1982 and concluded during the dotcom bust in 2000. During this secular bull market — a term that denotes a bull market lasting many years — the Dow Jones Industrial Average (DJIA) averaged 16.8% annual returns. The NASDAQ, a tech-heavy exchange, increased its value fivefold between 1995 and 2000, rising from 1,000 to over 5,000.

A protracted bear market followed the 1982-2000 bull market. From 2000 to 2009, the market struggled to establish footing and delivered average annual returns of -6.2%.

Learn how you can profit in a bull market by reading Banking Profits in Bull and Bear Markets and also How to Adjust Your Portfolio in a Bull or Bear Market.

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