Stock Market Expectations: Follow the Secular Cycle

Most people are relying on the stock market to provide for their retirement and other long term goals. However, the stock market has been nothing but disappointing for most people over the past decade. To be a successful investor, one important key is to understand the current secular cycle.

Secular market cycles are generally defined as a long term trend in which a particular asset class or sub-class is trending upward (bull) or downward (bear). Within the prevailing secular trend there is short term bull and bear markets action called cyclical cycles. Secular bulls have the higher number and more acute level of cyclical bull markets within it while secular bear markets have a higher number and more acute level of cyclical bears cycles.

Below is a graph showing the secular trends in the U.S. stock market since 1900. Over this time period we’ve had nine secular periods with four secular bull markets and five secular bear markets. Currently we are within a secular bear cycle that began in the early part of 2001.

Graph Copyright ©2012, www.CrestmontResearch.com

Secular cycles usually last from five to twenty years. If the secular bear market follows the historical norm, we are looking at a reversal in the latter part of this decade. Secular bear markets tend to begin when a particular asset class is excessively overpriced from a historical perspective and is usually coupled with some tipping point where a change in geopolitical and/or economic climate usually does not support the asset class in question. For example, our current secular bear market began with stock values at historical highs and since then we’ve experienced several recessions, sovereign debt concerns and an arguable lack of political leadership. Secular bull markets tend to begin when a particular asset class is excessively underpriced from a historical perspective with a tipping point where change in geopolitical and/or economic climate is usually positive to the asset class involved. Our last secular bull market started in 1981 when stock prices were at historically low valuations and was followed by a period of political stability, deregulation, technological innovation, inflation was tamed and the Cold War came to an end.

Why is understanding the secular cycle so important? It’s because certain strategies can be effective in one secular cycle and be less effective in another. In my next blog posting I will discuss what to expect and how to invest in difficult market environments like we are currently experiencing.

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