Investors who participate in the stock market need to understand the risk and the volatility of the financial markets. Whether the market may be in a bull or bear phase can greatly impact the outcome of a person’s investments, especially when looking at the short-term. For novice and experienced investors alike, here are a few things you should know about bull markets.
The exact reasoning for the naming choice of the types of market may be unclear, but the general consensus relates to the nature of aggression in the animal namesakes. Where bears swipe downward with their paws to attack, bulls thrust their heads upward. The directional motif correlates, then, to the general decline or growth in market value.
In order for a market to be considered a bull market, it must meet certain requirements, the most basic of which relates to an increase of 20% from the S&P 500’s preceding low; conversely, the bull market effectively ends when the S&P 500 experiences a decrease of 20% from the former peak.
Characteristics & Circumstances
Generally speaking, bull markets occur during times of economic prosperity. Coupled with low unemployment and GDP growth, bull markets also foster greater levels of investor confidence and corporate profit. During bull markets, the number of initial public offerings (IPOs) is usually higher than during bear markets.
On average, bull markets tend to last less than 4 years. Bear and bull markets occur at a similar frequency, and the longest bull market on record lasted from 2009 to 2020. Often, bull markets peak roughly six to nine months prior to a recession which can mark the end of the bull market. Recession, geopolitical events, an increase in interest rates, and inflation all tend to contribute to the end of a bull market.
Typically, the most successful investing strategies are geared toward long-term growth. That being said, when investing during a bull market, investors should keep in mind that trying to time the market is often a flawed pursuit. Investing in stocks during a bull market should entail considerable market research to gauge the short-term and long-term growth of any given stock. Additionally, acknowledging the industries that tend to experience the most success during (and even beyond) bull markets could lead to greater returns; the materials and tech sectors are among the top-performing industries at present, for example, but history has shown very clearly, that can change very quickly. Having a well diversified portfolio is one of the strongest ingredients to investing success..
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