Bull markets typically take place when the economy is strengthening or when it is currently strong. But there’s way more worth being aware of before you invest big in a bull market.
According to financial expert and author Guy Baker, “there have been 13 bull markets since the Great Depression and nine since 1950. If you look at the big picture, you’ll see that the sharp, stomach-churning bear markets between those bulls only last a short period of time.”
Financial experts like Baker often advise taking a careful and close look at the bull market before going all in or getting out. To better grasp what’s really going on with the stock market right now and what might be happening next, you’ll need to consider the big picture.
Ready to take the bull market by the horns? Here’s what you need to know.
Bull Market Basics
Inna Rosputnia is a stock and futures trader as well as a longtime money manager and financial analyst. She describes the bull market as follows:
“A bull market is a period when the asset price goes up. It happens because of general optimism, rising investor confidence and expectations that prices will go up more. This period can last for months or even years.”
The seasoned financial expert goes on to explain what you can expect to see in a bull market. “During a bull market (or so-called bull trend) in stocks prices are expected to rise even after multiple declines,” Rosputnia says. “Periods of declines are called pullbacks. It will be worth mentioning three factors that give a fundamental basis for the bull market.”
The Three Fundamental Factors
According to Rosputnia, the first factor is expecting stocks to rise “when the economy is strong in general.” The next factor is to expect a growing GDP. The final factor to support the bull market is “falling unemployment.”
Rosputnia says, “All these factors increase investor’s confidence and optimism. This year we see the increase in IPO and valuation. It is another sign of a strong stock market.”
How Do You Know When It’s Time to Get Out?
Across the board, financial experts tend to agree that keeping your eye on the market is key. When the market is at an all-time high, the question becomes, what’s the next big move? Baker says people have been asking him questions like this lately. But the Wealth Teams Alliance founder says the biggest thing people want to know is if it’s time to get out. Here’s what the finance guru has to say:
“While it’s tempting to take some chips off the table when markets get jittery, don’t cash out unless it’s an emergency. You may have to pay capital gains taxes or early withdrawal penalties. Plus, there’s no place to ‘park’ your money short-term when interest rates are so low. Finally, you have to figure out exactly when it makes sense to get back into the market—and whenever you do, you’ll probably second-guess your timing. Research shows it’s almost impossible to time your market entry and exit consistently.”
Understanding The Yo-Yo Principal
Baker also provides a useful analogy to help explain bull markets a little better. It’s called “the yo-yo principal.”
“Imagine you’re spinning a yo-yo in your hand while climbing a staircase. The yo-yo goes up and down continuously, but it’s still reaching a higher altitude as you keep ascending the staircase. Over the last 95 years the market has consistently trended up, but there have been plenty of downs along the way,” he explains.
His conclusion? If you’re “young and healthy,” then you’re looking at decades before you have to worry about “the value of your portfolio.” So he advises that for now, you should “[s]tay fully invested. Diversify. Tune out the noise and move on with your day. By all means keep your investing costs down. Even paying 1% too much for advisor fees, fund fees, trading costs and allocation different can amount to a loss of 20.4% over 25 years. There’s no bull to that.”
Bull Markets Versus Bear Markets
A bear market is the opposite of a bull market. As explained by Investopedia, a bear market is characterized by “falling prices and typically shrouded in pessimism.” When it comes to the origin of these market terms, it’s suggested that the use of “bull” and “bear” are meant to represent the distinctive and different ways these animals attack opponents. Their modes of operating are seen as metaphors for how the market moves.
A bull is depicted thrusting its horns into the air, but a bear swipes and slashes its paws downward. In other words, upward trends indicate a bull market, and downward trends indicate a bear market.
Bull and bear markets tend to coincide with what’s going on with the economic cycle as a whole. The economic cycle is most often divided into four phases: expansion, peak, contraction, trough. When a bull market is beginning, it usually indicates a cycle of economic expansion. With that said, the public belief about future economic conditions tends to drive stock prices much more than exactly what’s happening right in front of us. So keep looking to the future as well as the past to understand market trends.
Per Investopedia, “the market frequently rises even before broader economic measures, such as gross domestic product (GDP) growth, begin to tick up. Likewise, bear markets usually set in before economic contraction takes hold. A look back at a typical U.S. recession reveals a falling stock market several months ahead of GDP decline.”
The Two Types of Bull Markets
There are two types of modern bull markets. They’re known as parabolic rise and gradual uptrend.
According to Rosputnia, “The key characteristic of the first type is fast and aggressive rise of the stock or other asset. Investors don’t have opportunities to increase position, because prices are rising very fast. On the other hand, investors profit fast. This type of bull market is very risky for inexperienced investors. Because it tends to blow-off aggressively as well. The second type of an uptrend is not so aggressive. It has multiple pullbacks and is good for compounding.”
Rosputnia adds, “more investors are willing to buy and fewer to sell” and notes that due to the ebb and flow of economic cycles “no bull market can last forever,” but says this is completely normal, even though trend reversal often scares many investors.
In reality, “declines in the economy and stock market create great investment opportunities,” she says.
How to Predict Market Trends More Easily
As you’ve likely figured out by now, perfectly predicting the beginning and the end of a bull market is often anything but easy. Luckily, there are standard ways to simplify this process and be prepared for what’s to come. Rosputnia has some expert insight on how to spot what’s happening and when it could be a bull market next. She reveals,
“Investors can use cycle forecasts to avoid buying stocks in the riskies periods. Also, there are general signs of accumulation (the cause for the new bull market) each investor needs to know. Accumulation looks like a long period of consolidation after a downtrend or pullback. So, investors can easily identify it on the chart. Also, the ratio of up days to down days during accumulation is pretty much equal. Thus, volatility tends to be low due to the lack of interest.”
The next thing you’ll want to consider is when you should (or shouldn’t) invest.
Knowing When to Invest
It’s widely believed that investors looking to benefit from a bull market should buy in early.
Doing so will help anyone investing in the bull market take maximum advantage of rising prices. They’ll also be able to sell their stock when it has peaked. While it can be historically difficult to determine a foolproof point when the peak or bottom takes place, losses are usually small and impermanent. In turn, the risks can prove well worth taking. After all, no matter how great the market rewards, there will always be some degree of risk involved.
The trick is knowing when to get in and what to look out for. This applies to the worst of times as well. Thankfully, certified financial planner Michael Shea is here to help us sort it out.
Shea says, “These can be fairly quick events, or they can last years in either direction. If you look at the Tech Bust in the early 2000s there were multiple years that resulted in negative returns on annual basis. It took much longer for a recovery to occur or get back to breakeven from the start of the crash.”
Based on the stock market’s history, Shea encourages people to expect events like these time and time again. “This is the nature of investing in stocks. There can be extreme fluctuations from one day to the next,” he explains.
With that said, Shea notes that it’s not so much about which market you choose, but about choosing to take a long-term approach to investment.
Shea explains, “taking a long-term approach to investing in stocks has rewarded investors over time based on academic research. The longer you are invested during both good and bad times the better your odds are for success. I’d encourage you to forget the bulls and bears. Focus on staying the course by having a solid investment plan in place to accomplish your goals.”