It is the news every retail investor has been waiting for: The S&P 500 officially entered a new bull market on Thursday after closing above the key 4,200 level, marking a jump of more than 20 per cent since it bottomed out at 3,577.03 on October 12, 2022.
The S&P, which tracks the stock performance of 500 of the largest listed companies in the US, closed at 4,293.93 and now joins the Dow Jones Industrial Average and tech-heavy Nasdaq in bull market territory.
The Dow entered a new bull market last November and the Nasdaq followed in May.
US markets have been buoyed by the so-called FAANG stocks – Facebook owner Meta Platforms, Apple, Amazon, Netflix and Google-owner Alphabet – fuelled by increasing investor interest in the artificial intelligence revolution.
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“The S&P 500 flirted with the 4,300 mark, again, and the index is up by more than 20 per cent since the last October dip, meaning that the S&P 500 stocks stepped into the bull market regardless of the tightening Fed, rising yields and the inverted yield curve,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said in a research note on Friday.
Last year’s record-high inflation, rising interest rates and geopolitical conflict dragged stock markets down as central banks set out to rein in the cost-of- living crisis by slowing their economies.
The long-awaited US Federal Reserve pivot – when it starts cutting rates rather than raising them – also dragged down investor sentiment.
However, the recent debt ceiling deal in the US and positive economic data have lifted hopes that the Fed will pause its rate increase programme this month, spurring risk-on mode in markets.
Here, we explain what a bull market is and why it is important.
What is a bull market?
A bull market occurs when a range of factors, such as positive investor sentiment, company results and economic data, combine to push up a bourse by 20 per cent or more above its most recent trough.
In this case, the S&P bottomed out in October 2022 at 3,577.03 – and closed on Thursday more than 20 per cent up at 4,293.93.
The sustained rally means that the S&P has begun a new bull market.
What is a bear market?
A bear market is the opposite of a bull market and is driven by negative sentiment. It refers to falling stock prices, typically for months. If a bourse falls 20 per cent or more from its most recent peak, it has officially entered a bear market.
In contrast, a stock market correction happens when share prices fall 10 per cent.
Why are they called bull and bear markets?
There are different schools of thought on why they are nicknamed bull and bear markets.
The most simple explanation is that bulls charge ahead, while bears hibernate.
Another is that a bull thrusts its horns upwards when attacking and bears swipe down, according to Investopia.
“These actions were then related metaphorically to the movement of a market. If the trend was up, it was considered a bull market. If the trend was down, it was a bear market,” Investopia said.
When did the new bull market begin?
The S&P’s new bull market began on October 13, 2022, the day after it closed at its most recent low, according to analysts.
How long do bull markets typically last?
Since 1932, the average bull run has lasted 3.8 years, according to market research company InvestTech Research.
The S&P’s longest bull run lasted for 11 years. It started in March 2009, towards the end of the global financial crisis, and ended in March 2020, as the Covid-19 pandemic started causing havoc in financial markets.
What about bear markets?
History tells us that the average bear market lasts 289 days, or about nine and a half months.
Are bear markets always negative for investors?
There is a silver lining to a bear market.
Financial experts say it is a perfect opportunity to continue buying the dip to take advantage of low stock prices – which will eventually return to positive territory.
However, it is important for investors to avoid panic selling when they see the value of their portfolios fall.
As renowned investor Warren Buffett, the chairman and chief executive of Berkshire Hathaway, once said: “Remember that the stock market is a manic depressive.”
Can investors benefit from a bull market?
History also shows that the biggest returns are made in the early stages of a bull market.
However, a buy and hold strategy is also recommended, particularly as the swinging highs and lows of stock markets will continue as they have always done and timing the market is notoriously difficult, even for professionals.