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A bull market is often defined as a period during which a major market index has risen by 20% from a recent low.
But the question of whether we're in a bull market at any given time relies on how you interpret that definition. For instance, which market index are you using? And how recent does the recent low have to be?
As wishy-washy as that conclusion might seem, it's crucial to understanding the ambiguity that can come with trying to read investor sentiment during a time of shifting economic expectations.
While not everyone is ready to say we're in a bull market now, financial advisers broadly agree about how to invest during one.
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Bull market definition
The U.S. Securities and Exchange Commission defines a bull market as "a time when stock prices are rising and market sentiment is optimistic."
More specifically, the SEC says a bull market tends to be marked by "a rise of 20% or more in a broad market index over at least a two-month period. "
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(The inverse of a bull market is a bear market, in which prices and sentiment are in a downward trend).
However, the start or end of a bull market isn't always so clear cut to those actually watching the market. A short-lived upswing — or downturn — may not tell you everything about investors' attitudes.
Not every upturn in stock prices indicates a bull market — and conversely, not every downturn indicates the end of a bull market, says Frank Paré, a certified financial planner at PF Wealth Management Group in Oakland, California.
“If there’s a 10% correction in the middle of the year, but the market finishes higher than the previous year, one can argue that we’re still in a bull cycle,” Paré says.
» Read more: Bear market vs. bull market
How long do bull markets last?
Between 1926 and 2019, the average bull market lasted 6.6 years and had a cumulative total return of 339%.
But that’s only the average length of a bull market — it’s not the maximum length.
Louis Barajas, a certified financial planner with LAB Business Management in Irvine, California, says that during longer-than-average bull markets, such as the one that ran from 2009 to 2020, some people become fearful because they misunderstand how averages work.
He says that some investors — including finance professionals — became unnecessarily conservative with their investments in the mid-2010s because they noticed that the bull market was lasting longer than average and feared that its end was near. But it didn’t end until the beginning of the COVID-19 pandemic several years later.
“People will react behaviorally when they look at some statistics. They go to Vegas, and they’re playing the roulette wheel, and it’s hit black, black, black, black — and they go, ‘Oh, it’s gotta hit red.’ But it could keep going black,” Barajas says.
Time is not a reliable signal of when a roulette wheel will land on red or black — nor is it a reliable signal of when a bull market will start or end. But are there other signals?
The beginnings and endings of bull markets
Valuation metrics
Paré says that valuation metrics such as PE ratio and dividend yield can give investors clues about where they are in the bull-bear cycle.
In the early stages of a bull market or the late stages of a bear market, the PE ratios of stock indexes like the S&P 500 tend to be lower than their long-term average, while the dividend yields tend to be higher than average. The opposite tends to be true in the late stages of a bull market or the early stages of a bear market — PE ratios are high and dividend yields are low.
For reference, the S&P 500 currently has a higher-than-average PE ratio and a lower-than-average dividend yield. These numbers are generally not indicative of a new bull market.
Euphoria and despair
Public sentiment is another potential signal of a transition between bull and bear markets, according to Paré.
“When we’re well into the top of a bull market, that’s when you’re getting investment advice from people who are not investment professionals,” Paré says, explaining that if you start hearing from random people on the street that it’s a good time to invest in stocks, that may be a sign of late-stage bull market euphoria.
And Paré says that just as public euphoria can indicate a late-stage bull market, general despair can indicate a late-stage bear market.
“That’s a lot of people running towards the exits, and people talking about putting their money under their mattresses,” he says.
Economic data
Delia Fernandez, a certified financial planner with Fernandez Financial Advisory in Los Angeles, said in an email interview that economic data, such as unemployment and inflation numbers, can also hint at when a bull market will begin or end.
Falling unemployment or inflation rates can indicate the beginning of a bull market while rising rates can indicate the beginning of a bear market. According to the Bureau of Labor Statistics, unemployment has been relatively stable over the past year between 3% and 4% .
Inflation, on the other hand, is decreasing — though it's still above normal levels .
Should you buy or sell based on these signals?
These signals aren’t reliable enough to guide investment decisions, Paré and Fernandez both say.
“I recommend that people be long-term investors with a diversified portfolio, and not try to time the market. After all, to be a good market timer, you have to be right twice; you have to know when to buy, and when to sell,” Fernandez said.
Paré says that a person’s goals and risk tolerance should guide buying and selling decisions — not attempts to buy at the bottom of bear markets and sell at the top of bull markets.
“These are just measures. I’m not going to say to clients, ‘The S&P is overvalued, therefore we need to sell,’” Paré says.
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How to invest during a bull market
Small-cap stocks and value stocks may outperform
Paré and Fernandez say that small-cap stocks can outperform major indexes such as the S&P 500 during bull markets — but they can also have higher losses during bear markets. They’re generally more volatile than the large-cap stocks that comprise the S&P 500.
Barajas says value stocks can be another good place to look during early-stage bull markets.
Hedging against future downturns
Once a bull market has been underway for a few years, some investors may be tempted to take some money out of stocks to prepare for a future bear market.
“Cash is usually the best hedge against a future downturn in the market, since it gives you money to buy when you see the market reverse,” Fernandez said.
Darius Gagne, the chief investment officer of Quantum Financial Advisors, a registered investment advisor in the Los Angeles area, says bonds can serve a similar purpose. Bonds provide a place to park money outside of the stock market so that it’s ready for spending or reinvestment in the event of a downturn.
Consistency is key
However, all four advisors emphasize that investors should stick to a consistent, long-term strategy through bull and bear markets alike — rather than trying to get into the market at the beginning of each bull cycle and out of it at the beginning of each bear cycle.
“Every single bear market has been temporary. As I often say to clients, I am not concerned about trying to dodge the next 20% temporary decline. I’m concerned about missing the next 100% advance,” Gagne says.
