What is a bull market?
Officially, a market is defined as ‘bullish’ when stock prices rise by 20% after two declines of 20% each. It is the opposite of a bear market where stock prices drop as a result of investor pessimism by 20% or more.
But what leads to a bull market? It’s actually pretty simple. A bull market simply reflects confidence and optimism in the future economy among investors. That’s why when investors start to catch on that stock prices are on the rise, they start buying stocks in hope that they will continue to do so. This confidence then has a snowball effect whereby stock prices continuously rise as more investors put more money into stocks because the demand for stocks exceeds the supply. Think of it as an economic boom — a sign that significant economic expansion is on its way.
KEY TAKEAWAYS
- A bull market is when stock prices of a market index, such as the S&P 500 rises by 20% after two declines of 20% each
- It reflects investor confidence and optimism about the state of the economy, who proceed to invest in stocks because they anticipate further economic growth
- Bull markets last between months and years and provide a good indication that an economic boom is on the way
How long do bear markets last?
Historically, bull markets last for different lengths of time — some have lasted for months, while others have lasted for years. Also, the rise in stock prices ranges across different periods of bull markets. Nonetheless, they signify that the economy is strong and that employment levels are high.
What is a bull in the stock market?
At this point, you’re probably wondering where the ‘bull’ in bull market comes from. It actually originates from the idea that a bull thrusts its thorns upwards. So an investor is ‘bullish’ when they’re optimistic about economic performance and consequently start putting their money into shares with the view that the economy will continue to grow. This stands in contrast to a bear market — i.e. when a bear swipes down — which is used to describe investor pessimism.
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 market vs. bear market
While we won’t get too much into what a bear market is here, it’s important to know how a bull market differs from it. In a nutshell, a bull market is when prices go up and a bear market is when prices go down.
A bull market represents optimism, confidence, and economic expansion, while a bear market reflects pessimism, lack of confidence, and that a recession could be on the way. As we previously outlined, when the trend is up, it's a bull market. If the trend is down, it's a bear market. Ultimately, it’s all down to consumer psychology and the actions they take towards their investments.
Bull market example
The most recent bull market followed the 2008 financial crash, and between 2009 and 2020, we saw the biggest bull market in history after the S&P 500 climbed its way out of the bottom. That all came to an end when the Covid-19 pandemic sent stocks crashing in March 2020. At that point, we entered a bear market. So as you can see, going between a bull market and bear market is a very natural part of the stock market cycle — in fact, it’s healthy!