What is a Bull Market?

The stock market can be a volatile place, which means ups and downs are an unavoidable part of investing. A bull market indicates stock prices are on the rise and investors are feeling optimistic. They may be willing to buy more when the stock market is thriving — but what goes up must come down. 

Knowing what to expect can help you prepare for the next bull run. Let’s unpack how it works and what to know about investing during a bull market.

What is a bull market? 

A bull market happens when a stock market index rises at least 20% from a previous low and sustains that increase for a sustained period of at least two months. If investors decide to hold on to their stock shares, that reduces supply and drives up demand even more. 

The S&P 500 has seen 11 bull markets since 1946, with an average annualized return of 18%. The term “bull market” is used to describe stock market conditions, not the economy, but bull markets are associated with positive overall economic conditions. That typically includes an expanding gross domestic product (GDP), which is the total value of all the final goods and services a country produces. Falling unemployment and rising wages can also be a characteristic of bull markets. 

Bear vs. bull market

Stock prices are directly linked to how investors feel about the market and the issuing company. When investor confidence is down and their market outlook is negative, that could lead them to sell their holdings and drive prices downward. A bear market happens when a market index falls by at least 20% over a two-month period or longer. Think of bear and bull markets as two sides of the same coin — one is up and the other is down.

A bear market can be brought on by all kinds of things,such as rising interest rates and inflation, which can go hand in hand. Inflation reduces purchasing power, and when consumers spend less, that can drive down both revenue and stock prices for companies. In an attempt to cool inflation, the Federal Reserve may raise interest rates, which increases borrowing costs for individuals and companies. That can stunt corporate growth and also affect stock prices.  

Global and domestic politics might influence stock prices, as well. These factors can all create a perfect storm for a bear market. Five out of the last seven bear markets have been accompanied by a recession.

How long do bull markets last?

Bull markets usually rally longer than bear markets. According to CenterPoint Securities, the average length of a bull market is 3.8 years. The longest one was the 11-year stretch that lasted from 2009 to 2020. Meanwhile, the average length of a bear market is a little less than 11 months. 

Average bull market length

The last bull run, which kicked in after the Great Recession, lasted more than a decade. But not all bull markets survive that long. The one that followed the Black Monday crash of 1987 only lasted 31 months. 

It’s important to note that stock market corrections can also happen during a bull market, which doesn’t necessarily mean that the bull market is over. A correction occurs when a stock market index dips more than 10% from a recent high. That doesn’t guarantee that a bear market is on its way, though. In 2014, worries over an economic slowdown, the Ebola virus and potential interest rate hikes fueled a correction that eventually rebounded. The bull market prevailed as the stock market continued its upward climb.

Bull market history

A bull market tends to happen after the stock market has been down for a period of time, whether that’s due to a bear market or an all-out recession. Other economic factors can also set the stage for a bull market. Here’s a look at different times the bull charged ahead: 

• After the recession of 1973–1975

• After the recession of 1981–1982

• During the technology boom of the 1990s

• During the economic recovery in the early 2000s 

• After the Great Recession of 2007–2009

Investing during a bull market

Even when the stock market is going strong, not all stock picks are winners. Risk is always part of the equation — and individual stocks are considered especially volatile. Below are some things to keep in mind when investing in a bull market.

Stay invested during the dips

Market volatility comes with the territory when investing. When a market index drops in value, even to the point it’s considered a correction, that doesn’t necessarily mean a bear market or recession is around the corner. Reacting emotionally and selling your holdings or waiting to start investing could cut you off from future returns. Tuning out the noise and sticking to your investment plan is usually the best approach. You can always revisit your asset allocation and risk exposure along the way.

Diversification is key 

It’s possible to be in a bull market and still experience losses. That’s why diversification is so important. Putting all your eggs in one basket, like a particular sector or asset class, exposes you to more risk. Remember that bull markets don’t last forever. If stock prices drop, will your portfolio be able to handle it? 

Like index funds, exchange-traded funds (ETFs) also offer built-in diversification. They allow investors to buy hundreds of stocks in one transaction, helping to mitigate risk. Acorns Invest automates the process and allows you to invest your spare change in highly rated ETFs without having to do any of the legwork.  

A bull market can be an exciting time when investors are feeling especially optimistic. But the stock market tends to swing from one extreme to the other, so a bull market is a temporary season that will eventually run its course. Staying well-diversified and committed to your investment plan could help you manage the turbulence with more peace of mind.