A bull market, or a bull run, is an extended period of rising stock prices, as measured by major indices like the S&P 500, the NASDAQ Composite, and the Dow Jones Industrial Average. Although people usually use the term in reference to the stock market, the term can apply to real estate prices, bond prices, commodities—any asset that can be bought and sold. 

A bull market isn’t usually defined with strict length or percentage rises, but most recognize a bull market as a period when there’s at least a 20% increase over a two-month span or more, measured by a broad market index. Bull markets coincide with and are bolstered by strong economic conditions, low unemployment, and often a rise in corporate profits. Historically, the bull markets in the United States have had some long runs, including the longest to date—from 2009 to 2019, which followed the U.S. housing market collapse and financial crisis of 2008.

Characteristics of a bull market

Bull markets aren’t just characterized by sustained rises in the market, but also by economic conditions and investor sentiment that accompany them.

• Investor confidence:

  The market is, in many ways, determined by investor confidence. When investors feel optimistic about economic and market conditions, they invest more boldly. Those decisions can lead to rises in corporate profits, higher stock prices, and overall growth. Investor confidence tends to grow as well, nudging markets further up.

• A strong economy:

  A bull market might begin when prices are low, as a bear market is ending, but economic conditions are usually strong when a bull market gets going. Unemployment might be lower, making people optimistic and more likely to spend money.  Because of the rise in investor confidence during a bull market, companies might choose to go public during a bull market.

• Higher demand and shorter supply of securities:

  Because investors are keen to buy securities during a bull market, there tends to be a shorter supply of securities and higher prices per share.

• Business profitability:

  Actual business profitability can lead to a bull market, but so can the perception of profitability—which might lead to the overvaluation of a business, as many will remember from the bull market run-up to the dot-com crash of 2000. The takeaway is that both fundamentals and optimism move the market.

• Interest rates:

  When the Federal Reserve lowers interest rates, the market assumes that consumers and businesses will increase their spending, which can cause stock prices to rise. Keep in mind that this is a general assumption: If the Fed lowers rates less than investors expect, that news can cause stocks to decline.

• Business investment:

  When consumers are buying, businesses also become more optimistic, investing in their company’s future by paying their employees more and hiring more workers.

• Lower unemployment rates:

  Corporate optimism and better compensation lead to lower unemployment. Workers are more likely to look for a job since overall pay is better, and companies will have to raise pay to compete for those workers.

• Higher spending:

  As investors are realizing returns on their stocks, money seems easier to spend. The flip side of this optimistic spending is higher and higher prices, leading to inflation or a market bubble. Financial bubbles, in individual stocks, entire sectors, or a whole market, happen when the price for that thing is substantially higher than its fundamental value.

Bull markets throughout history

Bull markets can be short or sustained. Here are some notable bull market examples.

Longest Bull Market in history: March 2009 to March 2020

After the bear market and Great Recession of 2007-2009, a period of slow and steady economic recovery, low interest rates, and increasing optimism resulted in the longest bull market to date, which lasted 131 months and led to a 400% gain in the S&P. The Dow Jones reached a record high in February 2020 and unemployment fell to a 40-year low. All this optimism ended as COVID-19 sent the world into lockdown. True to the textbook definition, the bull run was both preceded and followed by a drop, as the Dow lost over 20% in March and unemployment soared.

The housing boom: October 2002 to October 2007

In 2001, in response to an already struggling economy, the Federal Reserve began cutting the federal funds rate in order to encourage borrowing and spur spending. Interest rates went lower and lower, causing excitement among real estate investors and bull conditions in the real estate market. At the same time, the financial institutions that supported the mortgage industry invented new loan vehicles and lowered lending standards.

Banks and subprime lenders kept up the boom pace by selling mortgages on the secondary market to free up money for additional loans. When interest rates started to climb and the millions who had borrowed to buy houses they couldn’t afford began to default, the subprime mortgage crisis began. Banks folded, the government was forced to intervene and bail out the U.S. banking system, and the bull market ended in October 2007 as a recession began.

Post-World War II: June 1949 to August 1956

The grim reality of America’s entry into World War II was followed by a boom in industry in the 1940s, as America’s automakers, steelworkers, and shipbuilders went into overdrive making equipment to supply the war effort (bringing unemployment down to record low numbers). The optimism of the post-WWII years was fueled by economic strength built in part on a strong export market, which bolstered companies at home. During this period of economic expansion, a strengthened manufacturing sector started a period of innovation, producing new cars and inventions meant to increase household efficiency—in the middle of a baby boom. This bull run was curtailed in part when the Fed raised interest rates and investor confidence was shaken by international tensions.

What is a bear market?

A bear market is characterized by a downward trend in the stock market. Bear markets are the opposite of bull markets and generally come before and after a bull market.

The specific origin of the bull versus bear market terms is tough to pin down, but the popular image of a bull attacking with its horns up and its counterpart, the bear attacking with claws down, is how these market trends are represented.

Bull markets vs. bear markets

Just as bull markets are characterized by optimistic investors willing to take risks, rising share prices (which are in turn pushed higher by further investment), and a strong overall economic climate, a bear market takes the opposite path. Pessimistic investors sell their stocks, pushing share prices even lower, causing panic, and further pushing the market down.

Bull and bear markets can be seen at the top and bottom of the economic cycle, often referred to as a business cycle, which has four phases:

1. Expansion
2. Peak
3. Contraction
4. Trough
   

A bull market can indicate coming economic expansion since investor sentiment moves the market. In fact, the market may rise before leading indicators like gross domestic product growth and consumer spending kick in. Historically, a bear market will set when it still appears that the cycle is at its peak. In the economic cycle, as in most cycles, the only way to see the change is through the rearview mirror.

Investing in a bull market

Understanding the length and causes of bull and bear markets can influence how you react to them. For instance, bull markets usually last longer than bull markets. Historically, according to research compiled by Invesco, a bull market lasts an average of 1,742 days, versus 349 days on average for a bear market. A bull market gains an average of 180.04% to a bear market’s loss of 36.34%. As in all things cyclical, both peaks and troughs will inevitably reverse.

Here are some considerations for those investing in a bull market.

• Where is the peak?:

  Statistically, individual investors underperform the overall stock market, since they’re more likely to buy and sell their positions prematurely, based on emotion (or fear). Those who build positions over time are more likely to realize long-term gains. Most investors recognize that the old chestnut “buy low, sell high” applies here, although it is impossible to know when a stock has reached its low or its high, except in retrospect.
  

• Holdings:

  A basic market strategy is to buy and hold, and when investors have confidence in a security, they might continue to add to their holdings as they believe it will continue to rise. A good financial advisor can assist investors in formulating a strategy that they’re comfortable with.
  

• What about inflation?:

  Inflation can kick in near the end of an economic expansion. There are stocks that are often considered to be hedges against inflation. Materials stocks—or raw materials used in the manufacture of goods like concrete, metals, and plastic—historically perform when companies are recording profits and investors’ disposable income is higher. Just as in any investment change, though, consulting a financial advisor is key.
  

• Diversification:

  Spreading investments across asset classes is a well-known strategy, relevant during both bear and bull markets, that can buffer investors’ overall portfolios from the losses they’d incur by putting everything in a single investment category that didn’t perform or lost value. Diversifying can mean spreading investments across assets classes and also within asset classes, like investing across different sectors in the stock market. Regardless of where the market is in its cycle, investors often consider rebalancing their portfolio to reduce their exposure to risk and keep their eye on long-term goals.

The bottom line

Bull markets can be a time of heady optimism and rapid rises in share prices. But just as a bear market can change direction, so can a bull market, as markets are cyclical.  Some may be tempted to throw cash into stocks that are booming during a bear market. But those who take a long-term view, diversify, and understand the historical cycles of the market are often best positioned to achieve their financial goals.