What drives a bull market? How does it get started, and how does it end? What happens to stock fundamentals during these bullish times? There are no ironclad rules that can tell you when a bull market begins and ends, but there are some similarities that all bull markets share. Understanding the way bull markets work can help you become a better and more informed investor -- and if you're the inquisitive sort, you're also bound to find some interesting parallels between otherwise unrelated market cycles. History may not repeat, but it often rhymes.
Here, in the first installment of a three-part series, you'll find an overview of notable bull markets in the history of the Dow Jones Industrial Average. Each bull market overview includes some basic background data, some of the market's major fundamental changes during those periods, and a brief description of the economic, social, technological, financial, and political forces at work. When you've finished reading, don't forget to check out the other parts of this series, as well as the companion series to this one that highlights the Dow's many bear markets. You'll find the links below.
1896-1899: Railroad merger mania
- Began (starting price): Aug. 7, 1896 (28.66)
- Ended (final price): Sept. 5, 1899 (77.61)
- Number of trading days: 772
- Total percentage gain and average gain per trading day: 171%, 0.22% per day
- Volatility (i.e., average daily price change): 0.98%
- Cyclically adjusted P/E, initial and final: 15.7 to 20.6 (31% increase)
Charles Dow first published his index during the early days of recovery from the Panic of 1893, which was the second major crash in the late 1800s resulting from railroad overinvestment. This bull market was marked by an extreme level of railroad and other industrial consolidation, which made distressed railroad assets more productive. More than 1,200 mergers were completed in 1899, up from just 69 in 1897.
1900-1901: McKinley's boom
- Began (starting price): Sept. 24, 1900 (52.96)
- Ended (final price): June 17, 1901 (78.26)
- Number of trading days: 182
- Total percentage gain and average gain per trading day: 48%, 0.26% per day
- Volatility: 1.02%
- Cyclically adjusted P/E, initial and final: 18.1 to 23.1 (28% increase)
The re-election of pro-business President William McKinley was a decisive rejection of the unpopular bimetallism -- where gold and silver can be used as legal tender -- of William Jennings Bryan and rekindled an interest in railroad stocks that continued until McKinley's assassination a year later. Real earnings were essentially flat for the period; the increase in Dow prices was almost entirely inflation- and valuation-based.
1903-1906: Industrial rally
- Began (starting price): Nov. 9, 1903 (42.15)
- Ended (final price): Jan. 26, 1906 (102.9)
- Number of trading days: 557
- Total percentage gain and average gain per trading day: 144%, 0.26% per day
- Volatility: 0.78%
- Cyclically adjusted P/E, initial and final: 15.4 to 19.9 (29% increase)
A surge in industrial production and manufacturing output drove this bull market, which also experienced two revolutionary developments: the founding of Ford (NYSE:F) and the Wright brothers' first flight at Kitty Hawk, both in 1903. New York real-estate values soared along with the index as the investment community competed for prime properties.
1907-1909: Retail investor rebound
- Began (starting price): Nov. 22, 1907 (53.08)
- Ended (final price): Nov. 19, 1909 (100.53)
- Number of trading days: 503
- Total percentage gain and average gain per trading day: 89%, 0.18% per day
- Volatility: 0.73%
- Cyclically adjusted P/E, initial and final: 11.3 to 14.8 (30% increase)
A successful resolution to the Panic of 1907 engendered positive sentiment, and many people found themselves with cash on hand after frantic bank runs. Depressed valuations at 1907's lows prompted small investors to flood into the market. By the end of this rebound, more than 400,000 new names were recorded on the stock books, with the large Dow-type industrial stocks gaining 100,000 of these investors. This was one of the rare investing climates where the little guy didn't get taken for a ride.
1914-1916: World War I boom
- Began (starting price): Dec. 24, 1914 (53.17)
- Ended (final price): Nov. 21, 1916 (110.15)
- Number of trading days: 481
- Total percentage gain and average gain per trading day: 107%, 0.22% per day
- Volatility: 0.87%
- Cyclically adjusted P/E, initial and final: 10.2 to 11.4 (12% increase)
This was the only bull market that can be definitively credited to executive action. A six-month shutdown following the outbreak of World War I generated greater interest in trading and tamped down the selling instinct. When markets reopened in December, America's neutrality brought a flood of funds to U.S. businesses and markets as its industrial enterprises (the "war brides") rushed to supply European belligerents.
1917-1919: Auto bubble
- Began (starting price): Dec. 19, 1917 (65.95)
- Ended (final price): Nov. 3, 1919 (119.62)
- Number of trading days: 463
- Total percentage gain and average gain per trading day: 81%, 0.18% per day
- Volatility: 0.85%
- Cyclically adjusted P/E, initial and final: 6.6 to 6.5 (3% decline)
Railroads were nationalized at the end of 1917, which restricted investment to other industrial enterprises. A booming auto industry, which had readily adapted to Ford's assembly line innovations, drew much of this channeled interest. Loose monetary policies at the recently created Federal Reserve, undertaken in response to the war, added about $3 billion worth of liquidity to the economy during this period -- equal to about 3% of national GDP at the time. Real earnings declined more than they would for any other bull market during this period, and inflation ran at a heightened level. From 1915 to 1919, the stock of General Motors (NYSE:GM) went parabolic, mimicking the performance of many large tech stocks in the 1990s.
1921-1929: The Roaring '20s
- Began (starting price): Aug. 4, 1921 (63.90)
- Ended (final price): Sept. 3, 1929 (381.17)
- Number of trading days: 2,007
- Total percentage gain and average gain per trading day: 497%, 0.25% per day
- Volatility: 0.73%
- Cyclically adjusted P/E, initial and final: 5.2 to 32.6 (531% increase)
This bull market was so long, sustained, and transformative that it remains the gold standard against which all others are compared. The spread of automobiles, telephones, electricity, motion pictures, airlines, and the consumer culture affected the lives of millions of Americans and pushed the stocks of many leading corporations in these industries to incredible heights. Radio kingpin RCA, one of the most notable stocks of this era, was worth $1 per share in 1921 and $573 at the market's peak. The strongest auto companies remaining after 1919's auto bubble popped made a spectacular rebound.
Putting it all together
America underwent a remarkable shift during the Dow's first three decades. Millions moved to cities and became part of a growing manufacturing infrastructure. A world war was won, and another loomed on the horizon. The stock market's focus shifted from railroads and commodities to consumer-focused technologies. Bankers and brokers were suddenly surrounded by ordinary men and women who jumped into this brave new world of investing. Sound familiar? It should. The same situation would play out more than once in the bull markets to come.
Want to learn more about market cycles? You can find the rest of the series here:
- An Illustrated Guide to Bull and Bear Markets
- The Postwar Bull Market Boom
- Bull Markets in Modern Times
- What Is a Bear Market?
- Recession, War, and Bear Markets
- Bear Markets in Modern Times
- The Complete Illustrated Guide to Secular Market Cycles
AUTHOR'S NOTE: The cyclically adjusted P/E referenced throughout is compiled by Yale economist Robert Shiller from a historical S&P 500 composite. The Dow is used in place of this composite because it offers precise daily closing dates and prices, rather than the monthly results used in Shiller's calculations. The difference between these two indexes from the Dow's creation in 1896, on an inflation-adjusted basis, is less than 3%.