Broadly speaking, a bull market is a sustained period — usually months or years — when prices rise. The term is most commonly used about the stock market, but other asset classes can also have bull markets, such as real estate, commodities, or foreign currencies.
What exactly is a bull market?
Usually, a bull market marks a 20% rise in stock prices, which follows a previous 20% decline and another 20% decline. As you can see from the chart below, a bull market began in 2003 and ended when the S&P 500 hit its peak in 2007.
But there's one important caveat: The bull market dates can only be known in retrospect.
Characteristics of a bull market
Several things tend to accompany a bull market. For starters, they generally happen during periods when the economy is strong or strengthening. Bull markets are often accompanied by gross domestic product (GDP) growth and falling unemployment, and companies' profits will rise.
Additionally, one of the best non-numerical indicators for a bull market is rising investor confidence. There is a strong overall demand for stocks during these times, and the general "tone" of market commentary tends to be positive. And, because companies can get higher valuations for their equity, we tend to see high levels of the initial public offering, or IPO, activity in bull markets.
The opposite of a bull market is a bear market, which is typically defined as stocks falling by 20% or more from a recent peak. Bear markets are often accompanied by recessions, falling investor confidence, and declines in corporate profits.
How to invest in a bull market
Regardless of what the market is doing, you should maintain a long-term focus to cultivate long-term wealth. While it can be smart to invest when stocks are cheap, it's unwise to try to time the market. Great long-term businesses can be found in any market.
One smart thing to do is learn the principle of dollar-cost averaging. This involves investing equal dollar amounts at specific time intervals, which can help you invest during a bull market while allowing your portfolio to benefit from corrections and crashes as well.
Historic bull markets
For example, consider the 2009-2020 bull market, which was the longest in stock market history. After plunging due to the 2008 financial crisis, the S&P 500 bottomed out in March 2009 and then proceeded to climb until early 2020, when the COVID-19 pandemic sent stocks crashing.
Before the latest one, a lengthy bull market lasted from 2002 until the late-2007 bear market that coincided with the financial crisis. The bottom line is that bull markets tend to be several years in length and are always preceded by and ended by bear markets.