A bull market refers to a sustained period — often months or years — when stock prices go up. It’s a time when investors are feeling optimistic, and they may take more risks than normal. Though bull markets aren’t as nerve-wracking as their counterpart, bear markets, you can still lose money during one.
Here’s what Canadians need to know about bull markets.
What exactly is a bull market?
Technically speaking, a bull market begins after stock prices rise 20% after previously falling twice by 20% each. For example, at the beginning of 2000, the Canadian stock market fell by 46%. In the middle of 2002, stocks began rising, and by 2004, after having risen by more than 20%, Canada was back in a bull market.
Though a bull market is often used to describe stock markets, any asset class can have one, including bonds, real estate, commodities, and foreign currencies.
Keep in mind that though stock prices tend to rise in a bull market, they can also fall. Bull markets describe an overall trend of an upward climb. During that period, stock prices could fall, but the strong economy and investor optimism generally bring them back up.
What characterizes a bull market?
Bull markets are typically characterized by a growing economy, low unemployment, and a strong gross domestic product (GDP). Consumers can afford to buy more products, use more services, and try completely new products and services, which, in turn, helps companies generate more profits and strengthen their stocks.
In addition, investors are typically extremely confident during a bull market. The demand for stocks is strong, which, coupled with the optimism and positive tones in the economy, helps raise share prices even higher.
How long does a bull market last?
Bull markets don’t last forever, though they can last a considerably long period of time. A look at Canada’s historic bull markets shows that bulls can last anywhere from one to 11 years, though nothing says they couldn’t last even longer.
In Canada, the longest bull markets took place during the following years:
- October 1962 to January 1966 (40 months)
- July 1970 to October 1973 (40 months)
- December 1976 to November 1980 (48 months)
- November 1990 to April 1998 (90 months)
- July 2002 to October 2007 (64 months)
- March 2009 to March 2020 (132 months)
What’s the difference between bull and bear markets?
Unlike bull markets, bear markets are market downturns. In general, a bull turns into a bear when stock prices fall by 20% after a recent market high.
Bear markets are characterized by investor pessimism. Investors are watching their portfolios fall in value, and many act on their fears and lock in losses by selling stocks. Alongside a bear market, the economy could be faltering, unemployment could be high, and companies are typically growing slowly or just staying afloat.
Though bear markets see a downward swing in stock prices, they don’t last as long as bulls. In fact, they hardly last longer than a couple of years. Because of this, the losses incurred during a bear market are almost always recovered quickly during a bull.
Are bull markets good?
In general, yes. Bull markets have positive vibes, mostly because investors are seeing their portfolios rise in value. Investors are feeling optimistic about the future, which leads to more risk taken and higher demand for stocks.
But bull markets aren’t always positive.
Bulls cross from “good” to “bad” when overconfident investors cause stock prices to rise higher than the stocks are actually worth. Often, you’ll hear this called “irrational exuberance,” which is a state of manic hysteria in which investors believe stock prices will keep rising and rising without giving critical attention to the underlying stocks themselves. In this state, investors become greedy, and they’ll start bidding wars to jack prices up even more. This creates an “asset bubble”: at a certain point, prices can’t rise anymore, investors panic and sell them, and the bubble bursts.
How should you invest in a bull market?
Regardless of whether we’re in a bull or a bear, the best strategy is to buy great stocks and hold them for the long term. While a bull market might present you with some lucrative opportunities for short-term gains, you could end up losing a lot of money if your principle strategy is to time the market and day trade.
In fact, bull markets make it easy to fall into the trap of greed. You want to get rich quickly, and a bull market gives you the opportunity to do so. But when scores of other investors are buying stocks and blowing up demand, everyone can drive stock prices above sustainable levels. At that point, all it takes is one market correction to bring everyone back down to reality.
Instead of being greedy, look for fast-growing companies that you believe will perform well for years to come — boom or bust. Add growth stocks to your portfolio and then hold them for the long term.
You should also consider employing the strategy of dollar-cost averaging. This involves investing the same amount of money every two weeks, month, or quarter (you decide the interval), no matter if the market is up or down. For example, you could set $100 aside every two weeks for stock investing. During a bull market, your $100 will buy fewer stocks since share prices are going up. But during a bear market, your $100 will buy more, since prices are going down.
This ensures you’re always investing consistently, and the balance between bear and bull markets means you don’t have to “time the market” to make gains.
Bear or bull, keep a long-term perspective
Whether we’re in a bull or a bear market, your best investing strategy is to stay invested for the long run. Don’t get too greedy and sell out when the market is high. And don’t panic and pull out when the market tanks. At the end of the day, those who build extraordinary wealth in the stock market are those who invest consistently and over a long period of time.
Motley Fool Canada‘s market-beating team has just released a brand-new FREE report revealing 5 “dirt cheap” stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don’t miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.