The difference between what I wanted to say a few words this morning Secular And Circular The market is more than just a technological difference followed by a handful of market historians, but also an explanation of why markets can and do move in such a confusing way.
A Secular market Economics is defined as a broad extension of corporate profit and technological advancement. It usually includes a bevy of new types of employment, many new products and services are offered. A secular spread touches almost every element of society. The secular bull market lasts anywhere from ~ 15 to 20 years (or more) and the secular bear market is about half to three-quarters longer.
A Circular market, On the other hand, can be thought of as a countertrend move (up or down). Cyclical markets tend to be much smaller in duration and depth and are often confined to a narrower part of the economy. They include both recession and expansion, and specific boom and bust of single sector.
Why is this difference so important?
Because they have a significant effect on the probability of expected returns and future market behavior. Understanding this can be the driver of how you determine your risk stance and portfolio position. It’s the key to getting through both types of intact markets.
Consider the chart above, courtesy of Stephen Sutmeyer of Bank America Merrill Lynch. It shows the market for three distinct secular bulls – the post-war era (1950-1966); The late 20th century (1982-2000), and the current expansion (2013-?). Each of these three years can be defined by dramatic technological and economic growth.
Consider also the three secular beer markets: 1937-1950; 1966-1982; And 2000-2013. Everyone is involved in economic weakness, geopolitical or social instability, and weak profits in corporate profits.
It is also worth noting that during the secular bull market, sentiment tends to be positive as expressed by the increased desire to spend more on each dollar earnings (multiple expansion). During the secular bear market, the opposite happens with the desire to pay for every dollar earned (multiple contracts) decreases.
Research from Fidelity (2013) highlights the peculiarities of the secular market:
A The average secular bull market Lasted 21.2 years and generated a total return of 17.2% in nominal terms and 15.9% in actual terms. Market P / E has more than doubled, from 10.1 at the beginning to 20.5 at the end.
A The average secular bear market Lasted 14.5 years and its nominal total return was + 1.0% and actual return -2.3%. The market P / E has shrunk by 9 points on average, from 20.5 at the beginning to 11.3 at the end.
Note: I don’t stock too much on theories that define periods (17.6 years of Balenthiran, 56 years of Benar – cycle, etc.). Instead of hard and fast rules, I prefer wide range, because no two eras are identical. But in general, we can recognize some similarities to drive economies and markets in different eras.
The current era is driven by a variety of new technologies ranging from apps to AI to big data to physics and non-carbon energy, mRNA and biotech. These seem to be narrower than in previous cycles (commercial aviation or electronics) but on a much larger scale. There are a variety of wild cards, including group polarization, social media, and global geopolitics. Any one of these can have external influences that challenge the secular environment.
Based on our recognized small sample set of 20th Century markets, this suggests that the current drawdown is a traditional cyclical pullback, a countertrend sell-off that may last months or quarters (but not years or decades). Looking at history through this lens also means that we are about 2/3 of the way to a secular bull market that started in 2013 and could go on for another 5-10 years or more.
Since we do not know what the future holds, it is effective to lean towards possibilities. My study of market history suggests that it is likely that the market for this circular bear will end later this year and that the secular bull market will regain its upward trend.
The end of secular bulls? Not so fast (April 3, 2020)
Redefining the Bull and Bear Market (August 14, 2017)
Secular Market Cycle reflects the geopolitical, economic and technological issues of the era (November 15, 2014)
Is the secular beer market going to end? (February 4, 2013)
Looking Too Long (November 6, 2003)
Bull and bear market