Benzinga - by MarketBeat, Benzinga Contributor.
Stock market bulls are back in control as major US indices have soared to new all-time highs to start 2024. Despite apprehension over inflation and high rates, bullish market trends have overtaken these concerns, in no small part thanks to exuberance over artificial intelligence innovation. But what is a bull market in stocks exactly, and how should investors react to these new highs? In this article, you'll learn the technical bull market definition, how to trade a bullish stock market and what a bull market means for the broader economy.
Key Takeaway
Understanding Bull Markets
Causes of Bull Markets
- Expanding GDP
- Low unemployment
- Technological advances
- Declining interest rates
- All-time highs in stock indices
- Increasing retail sales
- Positive investor sentiment
- Rotation into riskier market sectors
Anatomy of a Bull Market
Several factors can enhance investor sentiment during bull markets, such as improving economic data, declining inflation or lower interest rates. Bull markets can take years to flow through market participants before capital becomes depleted or the economy stumbles.
Examples of Historic Bull Markets
The Roaring 20s The bull market preceding the Great Depression saw incredible wealth creation and cultural expansion. Jazz was born, women gained suffrage, and the economy roared for nearly a decade until the Crash of 1929.
Dot Com Boom Tech stocks soared to unprecedented levels with the birth of the Internet in the early 1990s. By 2000, the NASDAQ had gained over 800% in about 5 years, creating a speculative bubble few markets had seen before.
Post-GFC Bull Market Stocks suffered in ways not seen since the Great Depression in 2009, but one of the longest bull markets in history soon followed. The S&P 500 went more than 9 years without suffering a 20% drop and posted positive returns for six consecutive years.
Key Drivers Behind Bull Markets
Since no 2 bull markets are alike, let's analyze all potential drivers and factors:
- Fiscal Policy: When Congress authorized the Treasury to send economic impact payments to Americans during COVID, that was an example of fiscal policy. Fiscal policy comes from Congressional spending or taxation.
- Monetary Policy: Action from the Federal Reserve is called monetary policy, which comes from interest rate adjustments and open market operations. An excellent way to differentiate fiscal and monetary policy is to think of fiscal policy as targeting demand while monetary policy targets supply.
- Technological innovation: Exuberant investors often reward revolutionary technology. And while the Dot Com bubble was loaded with hubris, the internet's rise was indeed a world-changing event. From the printing press to the assembly line to the iPhone, innovation that drives the economy forward can often be what defines a bull market.
- Geopolitical stability: Tension between nations can often disrupt markets. For example, Russia's invasion of Ukraine in 2022 sent oil prices skyrocketing for several weeks as supply concerns spilled onto the world stage.
Bull Market vs. Bear Market: What's the Difference?
Bear markets also occur for a number of different reasons, such as crumbling investor sentiment, poor economic data, government policy errors or geopolitical strife. But it's important to remember that bear markets (and bear market rallies) are a natural part of the market cycle, and investors with risk controls have no reason to fear them.
Investing Strategies for Bull Markets
- Growth investing - During bull markets, value stocks are the Rodney Dangerfield of the exchanges: they get no respect. Bull markets create conditions where growth stocks prosper since investors are willing to forgo current profits for future promises.
- Momentum trading - Using a momentum strategy is a famous bull trading technique since volatile stocks often create profitable opportunities. Technical tools like moving averages, support and resistance and oscillators like Relative Strength Index (RSI) can be helpful when riding bull market momentum waves.
- Sector rotation - When sentiment is high, investors look for bull stocks, meaning sectors like tech and consumer discretionary. Investors rotate from safer sectors like utilities and staples when indices rise, and vice versa during bear markets.
Risks and Challenges in Bull Markets
Here's an example- many investors are currently overweight tech thanks to incredible gains from the semiconductor sector. Companies like NVIDIA Corp. (NASDAQ: NVDA) have lofty valuations, but how do you know when to sell? Instead of looking for market signals, consider selling shares of any stock that grows over 30% of your portfolio. Rules create diversified portfolios and prevent investors from panic-selling during downturns.
How to Take Advantage of a Bull Market
Evaluate Your Portfolio's Risk Level Is your portfolio too conservative for a bull run? You shouldn't leap into volatile tech stocks, but too little risk can leave your portfolio underperforming.
Rotate Asset Allocation If you find your risk level lacking, consider a sector rotation. During bull runs, growth-focused sectors often outperform.
Don't Time the Market Trying to pick market tops and bottoms is a fool's errand. Market timing is one of the worst ways to mismanage a portfolio, and emotions often get the best of investors who lack a rules-based plan.
Bull Markets Are Exuberant Times, But Don't Ignore Risk All-time market highs characterize a bull market, an expanding economy and improved investor sentiment. However, bull markets aren't an excuse to throw caution to the wind and buy up every hot stock profiled on CNBC. Make sure to reevaluate your goals during bull markets to avoid any ‘irrational exuberance'.
FAQs What does bull market mean? Here's a quick answer and a few more commonly asked questions.
What is a bull and bear market? Bull markets occur when market averages increase 20% and hit all-time highs; bear markets are declines of 20% or more.
Is a bull market good? Bull markets are suitable for long-term investors seeking appreciating stock prices. Unless you're shorting the market, you want to see bull markets materialize.
What is an example of a bull market? The bull market from 2009 to 2018 is one of the longest in history. Stocks went nearly a decade without suffering a 20% decline.
The article "What is a Bull Market? Key Information about Bull Markets" first appeared on MarketBeat.