Strong as a bull (market)
The bull is a powerful creature that has long been a symbol of strength and stamina. Today, the bull continues to have a significant meaning for investors and represents a time during which share prices are rising.
Investors often talk about both bear and bull markets. Bear markets can be easily identified because they’re usually associated with extended market decreases, sudden market crashes or broad economic recessions. Bull markets, in contrast, tend to happen over long periods of time. So, how is a bull market identified and how can investors take advantage of one?
What is a bull market?
A bull market is a period when the stock market is rising, usually in tandem with strong economic growth. Bull markets can last for many years and generate significant financial returns for investors who are patient.
There is no specific metric used to mark the beginning of a bull market, although the most common definition is when stock prices rise by at least 20% (usually after a drop of 20%). Bull markets are also characterized by optimism, investor confidence, and expectations that strong results should continue.
We’re in the bullpen -- for now
The current bull market began in March of 2009, nearly eleven years ago. Since then, the US stock market has risen over 280%! That means that $100 invested at the bottom of the market would have grown to $380 today. This is now the longest bull market on record, surpassing the decade-long bull market of the 1990s.
The below chart shows the Standard & Poor’s 500 Index (S&P 500) over time. The left axis represents the market price of the S&P 500, and the bottom axis represents the year. As you can see, there has been significant growth since March of 2009 -- when the current bull market began. However, both bull and bear markets are natural parts of a market cycle, and investors should be prepared to experience both.
Source: Clearnomics, Standard & Poor's
Short-term volatility is to be expected
Of course, bull markets don’t always go up day after day, week after week. There may be short-term market drops, or even “market corrections” when the market falls 10% or more. This is a natural part of investing in stocks – investors should expect a significant degree of volatility. However, if the economy and the underlying trends are still favorable, the stock market often tends to recover.
Bull markets don’t die of old age
There’s no pre-set time limit on how long a bull market can last. However, eventually, there will likely be a recession or another market event that causes a bear market. Bear markets are usually defined as a 20% or greater drop. Recent market activity has resulted in certain sectors, such as energy and technology, decreasing from their highs earlier in the year and starting to approach bear territory. It may take quarters or even years for the market to fully recover from a bear market, but once it does, a new bull market cycle will likely begin -- and hopefully grow stronger than ever.
Mess with the bull, and you may get the returns
Investors who are patient and stay disciplined through market volatility are often rewarded. The ability to take the bull by the horns and maintain a diversified investment portfolio across all phases of a market cycle is an essential aspect of long-term investing.