Markets are off to an optimistic start as the momentum built in Q4 of 2023 continued through the first three months of 2024. However, despite new all-time highs in the S&P 500, some investors are still riddled with bear market anxiety as rates and inflation remain elevated. Has the market finally turned toward a new bull run?
With the arrival of new all-time highs earlier this year, the market has successfully navigated a prolonged bear market and entered a new bull run. Stocks dipped nearly 20% in 2022 as the Federal Reserve raised rates rapidly to blunt inflation, but the S&P 500 gained 24% in 2023 and is already up almost 10% through Q1 2024.
In this article, you’ll learn how and why bull markets form and what characteristics to expect when investor sentiment is high. Additionally, we’ll look at some bull market disadvantages and ways to manage your portfolio to prevent your heart from overruling your brain.
What is a Bull Market?
Most market analysts agree that a bull market is defined by a 20% gain in an asset or index. Still, when discussing broader market averages, some investors hesitate to claim a new bull market until a new all-time high is reached. But a bull market is more than just a number on a spreadsheet - it's also about the ‘animal spirits’ hypothesized by famous economist John Maynard Keynes.
Investor sentiment, psychology or emotion are all just different ways of describing Keynes’ animal spirits. When investors are confident and optimistic, they’re more willing to put capital into assets like stocks, which causes prices to rise further, creating more confidence and optimism. Usually, some type of catalyst triggers the sentiment shift, like a recovering economy or technological breakthrough, but the participants' emotions sustain bull markets.
Difference Between Bull Markets and Bear Markets
If stocks go up in a bull market, they’ll naturally go down in a bear market. But the difference between bull and bear markets goes far beyond just stock price action. Sentiment tends to follow price, so bear markets don’t just result in falling stock prices; they also create nervous and pessimistic investors.
Market analysts tend to agree that a 20% drop constitutes a bear market, but bear markets aren’t mirror images of their bull brethren. Bear markets are often noted by their speed, as the average bear market only lasts weeks or months. However, trouble usually starts brewing while the bull market is still running, hidden in economic data such as unemployment rate changes, GDP growth or institutional sector rotation.
Bear markets are a part of life and are often necessary for markets to function efficiently. Stocks can’t go up forever otherwise, investors wouldn’t earn returns above risk-free assets like Treasuries. You can’t avoid the occasional correction or bear market, but you can prepare for it by tailoring your strategies based on your risk tolerance and available capital.
How Long Does a Bull Market Last?
Some good news for bullish investors is that bull markets often last much longer than bear markets. Since 1957, the S&P 500 has gone through 12 different bull markets with an average length of almost 5 years. Two of the longest bull markets have occurred in the last 40 years: the bull market from December 1987 to March 2000, which included the Dot Com bubble, and the bull market following the Great Recession from March 2009 to February 2020.
What influences bull market length? Factors such as monetary and fiscal policy, economic performance and geopolitical stability affect market performance. However, the past isn’t predictive, and bull (and bear) markets materialize for various reasons. There’s no one-size-fits-all when it comes to vast and complex global markets.
4 Indicators of a Bull Market
Bull markets arise from a confluence of different circumstances, so it’s difficult to make blanket observations about what will and won’t cause a new one. However, bull markets often feature 1 or more of the following indicators.
1. Growth in Stock Prices
What’s the most obvious signal of a bull market? Up and to the right! When stock prices rise over a long period, investors notice and look for signs of increasing optimism, like improving sentiment, economic data or rotation to riskier asset classes and sectors.
2. A Strong Economy
Bull markets and strong economies don’t always go hand-in-hand, but a well-capitalized consumer is never bad for corporate profits. Signs of a healthy economy include high GDP, low unemployment and accelerating public optimism.
3. Positive Public Sentiment
The sentiment is vital to a bull market run because pessimistic investors will eschew stocks for safer assets like bonds. While the opinions of investors and business owners don’t always match the broader public, these surveys can provide helpful hints about market health.
4. Unrestrictive Policy
Government policy, whether monetary or fiscal, can also be a bull market indicator. When the Federal Reserve lowers interest rates, it attempts to spur borrowing and boost economic activity. The level of influence policy has on the market is debatable, but the government has significant financial firepower.
How to Take Advantage of a Bull Market
Bull markets can create enormous profits for investors. The average bull market has returned 169% from end to end since the S&P 500’s current iteration formed, and bull runs often have longer legs than investors anticipate. You don’t need to do much to your portfolio for a bull market, but here are a few tips to keep you from overmanaging.
Diversify Your Portfolio
You might hear friends and family talk about going ‘all-in’ on the hottest stock or trend, but diversification is a safer and more sophisticated approach. Not every bull market stock is a winner throughout the entire run, especially when the months and years start piling up. Do your research and build a strong and diverse stock portfolio.
Manage Risk
Risk tolerance is personal. Some investors can stomach a wave of sector-specific momentum, while others won’t stray too far from cheap index funds. But if you can appropriately manage risk based on your goals and timeline, you can earn outsized profits and sleep easily at night.
Stay Informed
A raging bull market is still no time to forget your rules. Continue tracking economic data and earnings reports, watch for rotation into risky or safer sectors and monitor sentiment surveys. Bear markets are difficult to predict, but you can add or subtract risk in a data-dependent method.
Disadvantages of a Bull Market
Bull markets aren’t always fun and games. Here are 3 trends to monitor when stocks are soaring to new levels:
Increased Volatility
Markets often take the long way up and the short way down. Large gains can be followed by sharp declines, and risk-averse investors may not enjoy the constant price gyrations. Stocks don’t go straight up, and bull market corrections are common.
Excessive Optimism
Optimism is a good quality, but an excessive amount can lead to asymmetrical risk-taking, susceptibility to scams and emotional investing. Confidence is one thing; believing everything a CEO or company tells you is another.
Investor Complacency
Finally, good times breed complacency, as investors begin to think a new paradigm has been achieved and that markets will continue to rise for years. Complacent investors are slow to react, often leaving them sprinting for the exit late once a market decline sets in.
Conclusion
Most investors want to experience bull markets. A strong economy, rising stock prices and increased optimism are generally good things for society (unless you have a newsletter to sell). But bull markets are only 1 part of the market cycle, and even the strongest rallies eventually fade. Having a plan for both bull and bear markets means less stress over your portfolio and possibly better performance, too.
Navigate Bull Market Trends with MarketBeat
Looking to invest in the bull market? MarketBeat has trend-following tools to help you meet your goals. Click here to view our product selection and compare features that match your investing style and budget.
