The S&P 500 index has a long-term average annual return of about 10% before inflation — and it’s up about 15% so far this year. Does that mean we’re in a bull market?
That’s a surprisingly complicated question. Not all advisors are ready to say we’re in a bull market — even though they broadly agree about how to invest during one.
Bull market definition
A bull market is a period of rising stock prices and optimistic sentiment among investors. It’s often defined as an increase of at least 20% over at least two months in a stock index such as the S&P 500, although some financial advisors are wary of that 20% definition.
According to the 20% standard, “one would say that we’re in a bull market while we still haven’t recovered from the current bear market,” says Darius Gagne, the chief investment officer of Quantum Financial Advisors, a registered investment advisor in the Los Angeles area. “In almost every bear market, you would have that phenomenon.”
He says he prefers a 100% increase — a doubling of a major stock index — as the definition of a bull market because it’s possible for an index to briefly rise by 20% in the middle of a longer-term downtrend.
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.
Gagne says that many investors don’t feel like they’re in a bull market until the indexes have surpassed their highs from before the previous bear market — hence his stricter definition that uses a 100% increase.
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.
Are we in a bull or bear market?
The S&P 500 officially entered bear-market territory on June 13, 2022, when it closed more than 20% lower than its January 2022 all-time high amid concerns about rising interest rates and a looming recession.
The index has recovered some of those losses in 2023, but the question of whether or not we’re out of the 2022 bear market yet — and into a new bull market — is contentious among financial advisors.
The case against the bull market
“There is still a lot of uncertainty,” Barajas says. “Most professional investors have been telling us for the last 2 1/2 years that we’re going to be entering a recession, and we’re still not in a recession,” he says, adding that he does not think we’re in a bull market yet.
Gagne agrees. “Nobody feels like we’re in a bull market right now,” he says.
The case for the bull market
On the other hand, Delia Fernandez, a certified financial planner with Fernandez Financial Advisory in Los Angeles, pointed out in an email interview that thecurrent stock markettechnically meets the traditional bull market definition.
“Given that the S&P 500 is up more than 20% from its October 2022 lows, you can certainly say we’re out of the bear market in the S&P 500,” Fernandez said — although she also acknowledged that the current upward trend could be a temporary rally in the middle of a longer-term bear market.
How to invest during a bull market
Small-cap stocks and value stocks may outperform
Paré, Gagne and Fernandez all 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.
Gagne says bonds can serve a similar purpose — they can 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.
More From NerdWallet
The article Are We in a Bull Market? originally appeared on NerdWallet.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.