10 things you must know about bull markets

It's easy to look smart when most stocks are gaining day after day, but how much do you really know about the workings of bull markets?

  • By Anne Kates Smith, Dan Burrows,
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There’s a saying on Wall Street: Don’t confuse brains with a bull market.

After all, when most stocks are gaining day after day, it’s easy to look smart. Indeed, the market has been in bull mode for so much of the last decade-plus, it's hard to remember what challenging investing looks like.

The S&P 500's (.SPX) longest bull market in history began in March 2009 and ended abruptly in March 2020, clobbered by coronavirus fears. The bear market that followed cut fast and deep, but bottomed out in late March. About a month after its nadir, the market returned to bull-market territory and – so far at least – looks poised to keep chugging along.

Indeed, from March 23 to June 19, the S&P 500 rose a remarkable 40%.

So, justified or not, those of us who have stuck around in stocks are probably feeling pretty brainy these days. Still, there’s plenty more to know about bull markets.

Why they call it a bull market

There are several theories. Some say it's because the New York Stock Exchange is built on land that was used by the Dutch in the 17th century to auction off cattle. Another popular explanation is that rising markets were once fueled by fast-talking brokers with exaggerated claims about stocks (thus the phrase, "a line of bull").

As much as the "line of bull" story rings true, the most widely accepted theory is that the actions of bulls and bears, when attacking an opponent, reflect market movements. Bulls thrust upward, while bears swipe downward.

When stocks officially are in a bull market

There are many misconceptions about bull markets. No, we're not in a bull market just because the pundits on TV say we are. Neither is it a bull market when a major stock market index – such as the Dow Jones Industrial Average, S&P 500 or Nasdaq Composite (.IXIC) – hits a new record high.

Rather, market trackers at S&P Dow Jones Indices (.DJI) define a bull market as a 20% rise in Standard & Poor’s 500-stock index from its previous low. By that measure – a 20% gain off the low – the current bull market began in early April.

Note that by that measure, a bull market comes to an end when the S&P 500 falls 20% from its peak.

But other market analysis and research houses view bull markets differently. For instance, Sam Stovall, chief investment strategist at investment research firm CFRA, recently told Kiplinger's Personal Finance that he defines a bull market as a gain of at least 20% too – but the market also must go six months without falling beneath the previous low. Other market participants will say that you can't truly confirm a bull market until you exceed the previous all-time highs.

By those measures, we might be in a bull market – we just can't confirm it yet.

How long the average bull market lasts

As much as investors would like the answer to this question to be "forever," bull markets tend to run for just under four years.

The average bull market duration, since 1932, is 3.8 years, according to market research firm InvesTech Research. As noted above, the longest bull market in history ran for 11 years, from 2009 to 2020.

How common bull markets are

Not including our current uptrend (because some strategists think it's a suckers' rally), there have been 26 bull markets since 1928, according to Ned Davis Research, which uses its own set of signals to determine bull and bear markets. We have seen the same number of bear markets over that time frame.

On average, stocks gain 112% during a bull market. That's against an average loss of 36% during a bear market. And, of course, stocks have only gone up over the long term.

The types of stocks that do best in bull markets

It depends.

Over the course of a bull market, different types of stocks will lead the pack. In a young bull market (early in an economic expansion), the cyclical sectors that are most sensitive to interest rates and economic growth do best, including financials, consumer discretionary (companies that provide nonessential goods or services) and industrials.

Later, tech stocks tend to lead mid cycle, and commodity-linked sectors, including energy and materials, often outperform at the end stages of the economic cycle.

Remember that a diversified portfolio will probably own all or most of these stocks, but the proportions will likely change over time.

The best-performing sector in the current bull market

The energy sector has outperformed the broader market by a wide margin over the past three months, with a gain of 44% as of June 18. Coming in second is the consumer discretionary sector, which is up 40% over the same time span.

Consumer discretionary, which includes everything from restaurants and retailers to hotel chains and cruise lines to advertising, broadcasting and publishing firms, has outperformed because of how badly it was beaten down in the February-March crash. The same goes for energy stocks, which suffered a double-whammy of recession and an oil glut courtesy of Russia and Saudi Arabia.

Rounding out the top five, the information technology sector is up 33%, materials are ahead by 29% and communication services have gained 26%.

The stocks leading the current rally

As expected, the list of best performing stocks in the S&P 500 since March 23 is heavy with energy names. Oil and gas driller Apache (APA) leads the way with a gain of 230%. Halliburton (HAL), Marathon Petroleum (MPC) and Noble Energy (NBL) are also in the top five, with price gains ranging from about 130% to roughly 150%.

Royal Caribbean Cruises (RCL) and homebuilder Lennar (LEN), each with a gain of about 110%, make the top 10.

Bull markets can morph into unsustainable bubbles

All the great bubbles started out as bull markets. From the Dutch tulip bulb mania of 1636-37 to the Nifty Fifty blue-chip stocks that collapsed in 1973 to the dot-com darlings that popped the turn-of-the-century tech bubble, spectacular rises and breathtaking falls prove that irrational euphoria and a herd mentality can catapult any market into oblivion.

To learn about the occasionally catastrophic combination of human nature and financial markets, read Manias, Panics and Crashes: A History of Financial Crises, by Charles P. Kindleberger. The newest edition of the classic book was updated by economist Robert Z. Aliber and released in 2015.

What a secular bull market is

A secular bull market is an advance usually measured by the decade instead of by the year, occasionally punctuated by shorter bear markets.

Secular bull markets include the run from 1982 through 2000 that saw prices for stocks in the S&P 500 rise more than 1,200%, despite bear markets in 1987 and 1990. The 1949-1966 secular bull withstood a nearly 30% drop in 1962. The average gain for secular bulls approaches 500%. Some market watchers believe we’re in the late stages of a secular bull that began in 2009.

What kills a bull market

A rising inflation, higher interest rates and recession can all contribute to the death of a bull market. But timing is everything.

The stock market anticipates a recession, typically peaking six to nine months in advance of the onset of one. Making things even trickier, stocks sometimes anticipate recessions that never materialize. Also, stocks tend to perform well in the early days of higher rates and rising inflation; they signal a strengthening economy, after all.

Eventually, however, higher rates choke off growth as inflation erodes the value of investment returns.

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