Takeaways
- Bull markets are when stock markets rise, and investor outlook is positive.
- Bull markets are increases of 20% or more in stock index prices from recent lows.
- Bull markets must last more than two consecutive quarters and sometimes last longer.
- Investors want to purchase before bear markets and sell during euphoric bull markets.
- Bear markets are the opposite of a bull market and are when prices decrease.
Stock markets ebb and flow based on the shifting tide of investor sentiment, changing market conditions, and global interactions. As a stock investor, it can be hard to know whether you are in a bull market, which is a sustained rise of stock prices over a period. What makes knowing if you are in a bull market hard to spot is understanding there is no one definition of a bull market.
What Is a Bull Market?
According to the U.S. Securities and Exchange Commission, a bull market is when investor sentiment is optimistic and stock prices are rising. They elaborate on the definition with more specific criteria, defining a bull market as a 20% rise in a broad market index over at least two months.[1]
While the definition of a bull market can be easy to define, believing the stock market is in a bull market, a shifting market, or bear market is where investors tend to diverge. Markets can fool investors in almost every camp. There can be short-term wings in stock value, which can quickly pivot the market into a downturn.
Market corrections make matters more complicated. Corrections occur where the market jukes investors into thinking it is about to turn up or down but only corrects 10% to 15% in one direction. These fluctuations can make it hard for portfolio managers and individual stock investors to beat the market.
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Bull Market Cycles
From 1926 to 2019, the average bull market lasted 6.6 years and generated an average total return of over 339%.[2] If you are like most investors, you want to be fully invested during the upslope of a bull market and dial your portfolio back when the market starts to flatten or change into a bearish direction. Knowing when to “leg in” and invest and what to look for helps investors make sense of the stock market.
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Smart Tip:
ETF or index portfolio managers usually have an easier time than actively managed funds because managers peg their investments to indexes like the S&P 500 or Dow Jones. As a result, passive investing can generate higher returns than active investing.
4 Phases of a Bull Market
Bull markets tend to come systematically, but only make sense with hindsight. Not all investors can spot a bull market and start investing at the trough. Instead, investors try to determine where the market is in a cycle and make investment decisions based on the information they have. Here are the four phases of a bull market cycle.
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1. Investor Pessimism
A bull market starts at the end of a bear market when investor sentiment is downtrodden. During this phase, investors have had to shift their portfolios to be more conservative or are licking their wounds from recent losses and trying to spot opportunities to recover losses.
At this point, “smart money” comes into the market. Institutional and accredited investors begin to see real value in stocks again because stock prices are low. These investors start buying, and where the shift from being pessimistic starts turning slightly positive.
2. Investor Skepticism
With the more professional investors taking positions during the pessimism phase, other investors feel there is flooring underneath their feet. As a result, investors realize that ratios investors use, like price-to-earnings ratios, have fallen significantly.
Investors start buying stocks, ETFs, target date funds, and mutual funds and making investment returns. Positive momentum begins to take hold of investors, and there is a turn towards optimism.
3. Investor Optimism
While there is skepticism during this phase, stocks begin to accrue value, and the baseline investor sentiment turns to optimism. The optimistic phase can be the longest period of a bull market because this is where the generalist investor tends to enter the market.
Not all bull markets are specific to stocks. A bull market can apply to bonds, cryptocurrencies, commodities, and housing markets. For example, there has been a recent rise and fall in cryptocurrencies like Bitcoin. Investors have made and lost money in both bull and bear surges.
4. Investor Euphoria
Although there could be investor optimism in the market, this doesn’t necessarily mean you are in a bull market. At this point, there could be a correction to the downside, which could simply be part of the ups and downs of the stock market.
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What separates a bull market during this period is that investor outlook turns euphoric. This euphoric period is characterized by unbridled optimism. Investors think their investments will continue to increase despite any odds. The euphoric period is the last stage of the bull cycle because the market eventually takes a nosedive into a bear market.
Should You Invest in a Bull Market?
Most finance professionals will tell you it is not a matter of timing when to invest. Instead, focus on building a well-balanced portfolio that is properly allocated in different asset classes. Diversification can help you make money in almost any market.
Your portfolio allocation is determined by a combination of your investment time horizon and risk appetite. The general mixture of a well-tuned portfolio consists of exposure to many different types of investments so that your portfolio is not subject to the whims of market fluctuations. Diversification is achieved through investments in stocks, bonds, high-yield savings accounts, real estate, and cryptocurrencies.
Investment strategies like dollar-cost averaging can help you build a diversified portfolio. In dollar-cost averaging, you invest consistently in a market, agnostic to how the market is performing. This strategy builds up investments over time, and (on average) your investment purchase price can be lower than if you were to buy a lump sum position.
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Smart Summary
Investing in the stock market can be one of the best financial decisions. Financial professionals recommend beginner investors have enough cash on hand – in addition to an emergency or slush fund – to invest comfortably. Whether you are buying your first stock or investing for retirement, understanding how the stock market and broader indexes work is a critical step for investor education. Learn about how adopting different investment strategies can separate you from other investors.
(1) U.S. Securities and Exchange Commission. Bull Market. Last Accessed January 19, 2025.
(2) First Trust Portfolio. First Trust Resources & Commentary. Last Accessed January 19, 2025.
