What Is a Bull Market and When Is the Next One?

Bull markets create lucrative long-term opportunities for prudent investors. So, what exactly are they? And what is the best strategy to protect and grow sustainable wealth?

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Investing during a bull market can be quite a fun experience. With share prices often enjoying explosive upward momentum, generating double-digit returns within a short space of time is seemingly easy. And who doesn’t love watching their portfolio grow?

Much like its counterpart, the bear market, bull markets create lucrative long-term opportunities for prudent investors. So, what exactly are they? And what is the best strategy to protect and grow sustainable wealth?

Let’s break it down.

What is a bull market?

A bull market refers to a period of time during which the price of financial securities is on a sustained upward trajectory as investor sentiment improves. It’s most commonly used to describe how stocks and shares are performing. Yet, in reality, it covers all aspects of the financial markets, including stocks, bonds, real estate, currencies, and commodities.

There is no strict definition as to what constitutes a bull market. However, the commonly accepted description is a 20% rise in stock prices after two periods of 20% declines. 

Typically, a growth index like the FTSE All-Share here in the UK or the S&P 500 in the US is used to determine when a bull market has begun.

Why is it called a bull market?

The origin of the terms ‘bull market’ and ‘bear market’ is subject to debate, but there are two widely accepted explanations.

The first relates to how these animals attack. Bulls thrust their horns upward while bears slash downward with their claws, metaphorically illustrating the movement of stock prices during their respective financial market environments.

The second is a bit more nuanced and linked to the middlemen involved in the sale of bear skins in the 1700s. These traders would sell bear skins they had yet to receive, speculating that the future purchase price would fall below their agreed selling price, profiting from the spread. Eventually, these bearskin traders gained the slang title of ‘bears’.

But other traders began buying bear skins hoping that prices would rise. And since the bears and bulls were opposite animals during the then-popular blood sport fights, the term ‘bull’ emerged to describe the latter type of trader.

What’s the difference between a bear market and a bull market?

As previously mentioned, the primary difference between these two investing environments is the share price trajectory. 

During a bear market, stocks and other financial assets see their prices decline consistently. This is usually a result of economic turmoil. Demand for products and services begins to fall, leading to a drop in demand for raw materials. The supply side of the equation is often left unaffected, resulting in widespread price drops sending revenue and profits in the wrong direction. 

Conversely, during a bull market, the economy tends to outperform expectations. With low unemployment, consumers have more capital to spend. This drives up demand for products and services, leading to sustained growth in most businesses’ top and bottom lines. As such, market trends start moving up.

How do bull markets work?

We’ve just looked at one of the primary driving forces behind a bull market – economic growth. But there are other influences on this investing phenomenon. 

With increased capital liquidity, investor confidence rises, and people are keen to profit from thriving businesses, driving up interest and demand to buy financial securities like stocks and shares. This, in turn, sparks other individuals to join in. After all, who wants to miss out on a wealth-building opportunity?

This psychological influence has a lot of advantages during a bullish market. With more money flowing into the market, companies have greater access to capital if they need to raise funds. Seeing firms issue new shares during a bull market is quite common. And the raised money can then be reinvested to fuel future growth.

With interest in shares rising, increased demand for products and services, as well as more capital available for companies to fund projects, stock prices can begin trending upward.

How long do bull markets typically last?

Much like bear markets, the length of a bull market ultimately depends on the driving force behind it and which index is used to measure it. 

If the catalysts behind the improved market trend are sustainable over the long term, a secular bull market may occur that can last for years. This is also true in the opposite direction, triggering a secular bear market. However, if the driving force is only short-term, the upward momentum may only last a few months.

Between 2009 and 2020, the investing community enjoyed one of the longest bull markets in history, coming in at just under 11 years.

The longest bull market on record in the UK was in January 1975, lasting 12 years and 10 months.

Bull markets throughout history

Looking at the FTSE All-Share index in the UK since 1926, the average length of a bull market has been seven years, with an average return of 507%. 

By comparison, the average length of a bear market during this time was 1.7 years, with an average loss of 36.5%.

January 19263 years 10 months47%
August 19324 years 6 months142%
September 194011 years 7 months341%
August 19525 years 1 month160%
April 19583 years 2 months168%
September 19626 years 6 months185%
July 19701 year 11 months103%
January 197512 years 10 months3,514%
January 198812 years 9 months571%
March 20034 years 9 months135%
April 200910 years 9 months212%

What does this all mean? In simple terms, the stock market goes up more than it goes down. That’s why long-term investing has proven to be one of the most lucrative methods of growing wealth over the past century.

How to invest in a bull market

Given that bull markets present exciting multi-year wealth-building opportunities for investors, what is the best investment strategy to profit from them?

1. Maintain a cash cushion

Regardless of how exciting the growth opportunities may seem, retaining a portion of wealth in cash is paramount. The share prices might be set to thrive, but even when times are good, something wrong can happen. 

The stock market is a volatile place. And even the most promising of investment opportunities can go south quickly. Being forced to sell shares in a winning position to meet living expenses due to a lack of cash cushion can be an enormous opportunity cost in the long term.

2. Buy quality companies

In a bull market, it’s easy for young, pre-revenue enterprises to build hype and secure funding from excited investors. However, it’s critical to remember that short-term capital gains are meaningless if they cannot be sustained into the future.

Companies that promise the world but deliver nothing are called growth traps. And when prices are going up, it’s easy to be led astray. By focusing on proven high-quality businesses, a better investment decision can be made to avoid these pitfalls.

3. Buy and hold

This is probably one of the most basic investing strategies around. Yet, it’s also one of the most lucrative if an investor can successfully identify a strong business with long-term potential. Holding onto a rising star today could lead to owning an industry titan in a decade. And that’s how fortunes are made.

This article contains general educational content only and does not take into account your personal financial situation. Before investing, your individual circumstances should be considered, and you may need to seek independent financial advice.  

To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a "top share" is always defined by the largest market cap at the time of last update. On this page, neither the author nor The Motley Fool have chosen a "top share" by personal opinion.

As always, remember that when investing, the value of your investment may rise or fall, and your capital is at risk.