3 signs that shares could be set for a new bull market

Stock markets are cyclical, and investors go through phases of buying and selling. How can we best deal with the next bull market?

Young brown woman delighted with what she sees on her screen

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What? A new bull market? Hang on, we’re only just entering a bear market, aren’t we? Well, maybe. But surely that’s the best time to be saving up as much money as we can to invest in shares before the next bull market pushes prices up again, isn’t it?

I mean, how many opportunities might we miss if we wait until shares have already climbed again and a new bull market is confirmed?

Timing

Sometimes there are external events driving stock markets. Right now, with the war in Ukraine, and economic problems following the pandemic, we’re seeing plenty of that.

But the main driving force behind the timing of bull and bear markets seems to be good old human emotion. And that’s never going away.

Whatever the causes, statistics suggest bull markets tend to run for about five years or so, on average, with the average bear market lasting a little over a year.

US markets tend to be more volatile and offer better indicators of market directions. And both the S&P 500 and the Nasdaq had been on bull runs since 2009, after the financial crisis. Those are long ones. The pandemic had little lasting effect, and both peaked around November 2011 before the bear kicked in.

It seems we’ve had getting on for eight months of a US bear market now, even ignoring the Covid dip.

Sentiment

Sentiment is hard to assess, and the headline-grabbing financial press isn’t much use. I prefer to listen to people around me, particularly those who don’t invest in shares.

When a family member tells me what shares the guys at their work site are talking about buying, things might be getting a bit toppy. When I hear that someone down the pub has just doubled his money on some share or other, then yes, I suspect we might be heading for a dip.

Right now though, I’m getting the opposite vibes. People who have told me they’re thinking about starting out in shares have gone off the idea. And folks are even sympathising with me because I have money invested in the stock market.

When pessimism reaches that level, surely it can’t be long before the next bull market starts?

Valuations

Then there’s the most important indicator of all, stock valuations. No, it’s actually the only worthwhile indicator. Those other two above, timing and sentiment, really don’t matter. Successful investors simply ignore both.

At the market peak in November, the Nasdaq was on a price-to-earnings (P/E) ratio of over 30. The index is loaded with high-flying tech stocks, so a premium valuation is no surprise. But that’s still twice the long-term FTSE 100 average P/E valuation.

Today, the Nasdaq P/E is down to around 22. And it’s been lower, dipping to around 20 a couple of times. Is that good value for a tech-heavy growth index? I think it is. And it might even have already started on the way back up.

The lesson for me is simple. Forget the noise about where stock markets are heading. And instead, focus on individual stock valuations. And I’ll buy when I see attractive ones, bull or bear.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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