What is a Bull Market?

A bull market is characterized by a prolonged period—often spanning several months or even years—during which stock prices experience consistent upward movement. This period is marked by heightened investor confidence and a generally optimistic outlook, leading to an increased willingness to take risks. While bull markets are generally considered more favorable compared to their volatile counterparts, known as bear markets, it’s important to note that financial losses can still occur.

For Canadians looking to understand the dynamics of bull markets, it’s essential to grasp the fundamental aspects that define them.

What is a bull market? 

A bull market commences when stock prices recover by at least 20% after having previously declined by 20% on two separate occasions. For instance, the early 2000s were a period of great volatility for the Canadian stock market, with a substantial 46% decline at the start of the millennium. However, by mid-2002, the market experienced a turnaround, and by 2004, having surged more than 20% from its lows, Canada found itself in the throes of a bull market once again.

Though the term “bull market” is most commonly associated with stock markets, it is not exclusive to them. Bull markets can also occur in other asset classes, such as bonds, real estate, commodities, and foreign currencies.

Keep in mind that though stock prices tend to rise in a bull market, they can also fall. Bull markets describe an overall trend of an upward climb. During that period, stock prices could fall, but the strong economy and investor optimism generally bring them back up. 

What characterizes a bull market? 

Bull markets are typically characterized by several key economic indicators that collectively create a favorable environment for growth and investment. Consumers can afford to buy more products, use more services, and try completely new products and services, which, in turn, helps companies generate more profits and strengthen their stocks. 

Investors are typically extremely confident during a bull market. The demand for stocks is strong, which, coupled with the optimism and positive tones in the economy, helps raise share prices even higher.  Here’s an overview of what characterizes a bull market:

1. Flourishing Economy: During a bull market, the economy is generally strong, with steady growth and development across various sectors. This economic health is reflected in numerous ways, including higher consumer confidence and increased business investments.
2. Low Unemployment Rates: Employment opportunities are abundant, and unemployment levels are comparatively low, contributing to a more productive workforce. With more people employed, disposable incomes rise, which further fuels spending and economic expansion.
3. Robust GDP Growth: A strong gross domestic product (GDP) is another hallmark of a bull market. It indicates that the overall economic output is increasing, driven by higher demand for goods and services.

Consumers, empowered by greater purchasing power, can buy more goods, utilize more services, and explore new products. This increase in consumer spending significantly boosts company profits, enhancing stock valuations and fostering further economic growth.

• High Investor Confidence: In a bull market, investor sentiment is overwhelmingly positive. This optimism leads to a robust demand for stocks, as investors, both individual and institutional, seek to capitalize on the upward trend.
• Rising Stock Prices: The combination of strong demand and positive economic indicators leads to sustained increases in share prices, reinforcing the bullish market trend.

The prevailing atmosphere during a bull market is one of anticipation and excitement, with participants eager to benefit from the continuous upward momentum.

How long does a bull market last? 

Bull markets don’t last forever, though they can last a considerably long period of time. A look at Canada’s historic bull markets shows that bulls can last anywhere from one to 11 years, though nothing says they couldn’t last even longer.

In Canada, the longest bull markets took place during the following years:

• October 1962 to January 1966 (40 months)
• July 1970 to October 1973 (40 months) 
• December 1976 to November 1980 (48 months)
• November 1990 to April 1998 (90 months) 
• July 2002 to October 2007 (64 months)
• March 2009 to March 2020 (132 months)

What’s the difference between bull and bear markets?

Unlike bull markets, bear markets are market downturns. In general, a bull turns into a bear when stock prices fall by 20% after a recent market high. 

Bear markets are characterized by investor pessimism. Investors are watching their portfolios fall in value, and many act on their fears and lock in losses by selling stocks. Alongside a bear market, the economy could be faltering, unemployment could be high, and companies are typically growing slowly or just staying afloat. 

Though bear markets see a downward swing in stock prices, they don’t last as long as bulls. In fact, they hardly last longer than a couple of years. Because of this, the losses incurred during a bear market are almost always recovered quickly during a bull. 

Bull Markets vs. Bear Markets

• Bull Markets: Characterized by rising stock prices (specifically an increase of at least 20% from the last market low), investor optimism, and economic growth.
• Bear Markets: Defined by a downturn in the market, with stock prices falling by at least 20% from recent market highs, coupled with widespread investor pessimism.

Transition from Bull to Bear

• A bull market can transition into a bear market when stock prices fall by 20% after a recent market high.

Characteristics of Bear Markets

• Investor Pessimism: Investors often see their portfolios decline, leading many to react out of fear by selling stocks and locking in losses.
• Economic Challenges: The broader economy may struggle during a bear market, with potential high unemployment and slow or stagnant company growth.

Duration

• Bear markets typically do not last as long as bull markets. They rarely extend beyond a couple of years.
• The losses experienced during a bear market are usually recovered quickly once a bull market resumes.

Are bull markets good? 

In general, yes. Bull markets have positive vibes, mostly because investors are seeing their portfolios rise in value. Investors are feeling optimistic about the future, which leads to more risk taken and higher demand for stocks. 

But bull markets aren’t always positive. 

Bulls cross from “good” to “bad” when overconfident investors cause stock prices to rise higher than the stocks are actually worth. Often, you’ll hear this called “irrational exuberance,” which is a state of manic hysteria in which investors believe stock prices will keep rising and rising without giving critical attention to the underlying stocks themselves. In this state, investors become greedy, and they’ll start bidding wars to jack prices up even more. This creates an “asset bubble”: at a certain point, prices can’t rise anymore, investors panic and sell them, and the bubble bursts. 

How should you invest in a bull market? 

Regardless of whether we’re in a bull or a bear, the best investing strategy is to buy great stocks and hold them for the long term. While a bull market might present you with some lucrative opportunities for short-term gains, you could end up losing a lot of money if your principle strategy is to time the market and day trade. 

In fact, bull markets make it easy to fall into the trap of greed. You want to get rich quickly, and a bull market gives you the opportunity to do so. But when scores of other investors are buying stocks and blowing up demand, everyone can drive stock prices above sustainable levels. At that point, all it takes is one market correction to bring everyone back down to reality. 

Instead of being greedy, look for fast-growing companies that you believe will perform well for years to come — boom or bust. Add growth stocks to your portfolio and then hold them for the long term. 

You should also consider employing the strategy of dollar-cost averaging. This involves investing the same amount of money every two weeks, month, or quarter (you decide the interval), no matter if the market is up or down. For example, you could set $100 aside every two weeks for stock investing. During a bull market, your $100 will buy fewer stocks since share prices are going up. But during a bear market, your $100 will buy more, since prices are going down. 

This ensures you’re always investing consistently, and the balance between bear and bull markets means you don’t have to “time the market” to make gains. 

Bear or bull, keep a long-term perspective 

Whether we’re in a bull or a bear market, your best investing strategy is to stay invested for the long run. Don’t get too greedy and sell out when the market is high. And don’t panic and pull out when the market tanks. At the end of the day, those who build extraordinary wealth in the stock market are those who invest consistently and over a long period of time.