Dylan Lewis: Hey, there, I'm Dylan Lewis from The Motley Fool. In this FAQ, we’re breaking
down what a bull market is and why investors like bull markets way more than bear markets.
The broad definition of a bull market is a sustained period where prices rise, usually
in months or years. The term is most commonly used in reference to the stock market, but
other asset classes can have bull markets as well, such as, real estate, commodities
or foreign currencies. Now, generally when you hear people talk about a bull market,
what you can somewhat safely assume is that they're talking about the stock market.
Now, there isn't a formal qualification for what defines a bull market and there are several
different definitions depending on who you ask. One commonly accepted definition of a
bull market is when stocks rise 20% or more following a previous 20% or more decline and
then followed by another 20% decline. We don't have to go too far back to see this in action.
Here's a look at the S&P 500 from the early 2000s to the beginning of the financial crisis.
As you can see in the chart, a bull market in stocks began in 2003, after the dot-com
crash bottomed out, and the S&P nearly doubled in the years that followed, until the financial
crisis where the market fell sharply in late 2008 and early 2009. We've been in a bull
market since the S&P is up over 300% since the lows of the Great Recession. We can say
at this point that we've been in a bull market for the past decade, but we don't know the
full extent of it because the dates of a bull market can only be known in retrospect.
Ditto for the bull market’s counterpart, the bear market. Take everything I just said
in reverse and you have the details of a bear market. It's a period when the market,
in our case the stock market, is down 20% or more.
The main takeaway is that bull markets are generally times of prosperity and growth and
bull markets tend to happen during periods when the economy is strong or strengthening
and the core economic metrics, like, GDP growth and company profits will be strong,
while other metrics like unemployment will tend to trend lower. One of the best non-numerical
indicators is consumer and investor confidence. During a bull market there's a strong overall
demand for stocks and the general tone of market commentary tends to be positive.
Now on the flipside, bear markets are marked by negativity and pessimism and these are generally
periods where companies are cutting back, possibly closing locations or laying off workers.
As those dominoes start to fall, unemployment can rise, growth can slow or even turn negative
and investor and consumer confidence can start to wane. As people start to worry about that
short-term outlook, they may sell investments, hoping to avoid losing money or more money,
and this behavior can become widespread causing stock prices to plummet.
Now, you might be wondering what to bears and bulls have to do with stock prices?
The term bear market is named for the manner in which a bear tends to attack. A bear will
usually swipe its paws in a downward motion on its prey, and for that reason a decline
in stock prices is a bear market. Similarly, the term bull market is derived from the way
a bull attacks its prey. Because bulls tend to charge with their horns thrusting upward
in the air, periods of rising stock prices are called bull markets.
Unfortunately for investors, bull market periods that last too long can give way to bear markets,
and that makes sense, good times generally aren't sustainable indefinitely. Some bull
markets end because of large economic issues, some irrational exuberance or some due to
bad actors and other factors. The point is, all bull markets do end at some point.
Likewise, at some point during a bear market, investors will eventually become enticed by
the low stock prices and begin reinvesting in the market. As trading activity increases
and investor confidence begins to grow, a bear market can eventually transition into
a bull market. Based on the history lesson from before and
what you may already know about the stock market, you might realize that bull and bear
markets are somewhat part of the natural economic flow of things. If you take a long-term historical look,
you’ll realize that bull and bear markets are an unavoidable part of how
the stock market operates. As we’re recording this video right now, we are deep in a bull market
and we will inevitably flip to a bear market at some point soon, it's a matter of
when, not if. Now, all that may sound concerning,
but it doesn't have to be if you have the right mindset.
Investment firm Invesco, ran the numbers and
from 1957 to 2018, there were ten bull markets and ten bear markets. During that period,
the average bull market lasted 55 months and gained over a 150%, and the average bear market
lasted just under a year and lost around 34%. The takeaway here is that major market drops
tend to happen quickly and their dips pale in comparison to the steady march of economic
growth and the longer bull markets that accompany it. That's why we here, at The Motley Fool,
take a long-term view and generally advise folks to keep money in the market unless they'll
immediately need it in the next couple of years, because timing buys and sells around
market tops and bottoms is incredibly tough to do.
That's going to do it for this FAQ. If you have questions I didn't answer, check out
our investing starter kit, it's free, and it covers everything you need to know to start
investing plus it has five great starter stocks. To get it, head over to fool.com/start.
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