Cyclical and Secular Market Trends
This is a repost of The Cabot Wealth Advisory by Michael Cintolo. We like what Mike has to say about the longer term market trends. Read On!
Cyclical and Secular Market Trends
February 2, 2012
Salem, Massachusetts
By Michael Cintolo
-Looking at the (very) big picture
-Nice January! What does it mean?
I'm as guilty as anyone of getting caught up in the short- to intermediate-term action of the market. But every now and again I like to sit back and look at the market's big picture ... the very big picture. I am talking about looking at decades at a time to remind myself where the market likely stands within its mega-trend. Today, we're closing in on what could be a very interesting juncture.
I'm referring to the market's so-called "secular" trends--those lasting a decade or two. That's in contrast to the "cyclical" trends, which usually persist for periods lasting from a few months up to a couple of years. For instance, the downturns of 1990 (the market fell 20% in three months), the crash of 1987 or even the meltdown of November 2007 through March 2009 were cyclical moves.
On a secular basis, however, there have only been a handful of moves. For instance, from about 1900 through 1921, the Dow Industrials didn't go anywhere, with a cap around 110. That was a secular bear market--stocks didn't go anywhere for years as valuations contracted and investor sentiment soured.
Then came the secular bull move through 1929; the Dow raced from 64 in 1921 to 386 at its peak! That bull move was actually a bit short by historical standards in terms of time, but the price move was dynamic.
Next was the secular bear phase, which lasted from 1929 through 1942 (at least by my count); the Dow declined from that high of 386 all the way to 93 during that time.
After that was the historic rally from 1942 through 1966, taking the Dow up more than 10-fold, from 93 to 1,001. Again, there were many cyclical bear markets during that time, including a few panics, but the mega-trend was up.
Then came the long, listless period of 1966 through 1982, as the Dow failed to break above 1,000 for any length of time. Its low during the secular bear market came in 1974 around 570.
Next was the secular bull move from 1982 to 2000, bringing the Dow up from 770 in August 1982 to 11,750 in early 2000, capped by the Internet bubble.
And since 2000, almost every investor would agree that we've been in the midst of another secular bear phase. The Dow has made some progress during this time, but the S&P 500 and Nasdaq (the leader of the last secular bull market) have not.
I see a couple lessons in all of this. First, multi-year periods like the current one are not unusual; in fact, they're quite normal and serve to work off the excesses of the prior secular bull market. Eventually they push stocks to severely undervalued levels, creating the next major buying opportunity.
Second, and most encouragingly, it's important to remember that the market is already 11-plus years into its current secular bear phase. Many investors who study these things believe it will take another two to four years before a long-term bull market begins ... but who knows? Maybe we've already finished it, as investors hunt for bargain valuations and high dividend yields (there are tons out there). Or maybe it will take another couple years in this wide trading range before the secular bear move ends.
Let me be clear: None of this will help you make money today or tomorrow. (The section below talks more about what lies ahead.) But I write this just so you can keep in mind the very big picture. Having already gone through two of the worst bear markets in history, as well as a mini-bear market in 2011, keep in mind the next 10 years--including the next secular trend--is likely to be up.
Bringing the discussion back to today's market, I came across an interesting study by Jason Goephert of Sundial Capital Research this week. It surrounded the well-known January barometer, which says (basically) that an up January portends an up market year, while a down January often ushers in a losing year.
As it turns out, the data surrounding the traditional January barometer is so-so. Generally speaking, yes, an up January is good, but there have been plenty of exceptions to the rule.
Mr. Goephert, however, looked at all Januarys where the S&P 500 rose at least 4%, something that has happened 23 times since 1929 and hasn't occurred since 1999 ... until this year, as that index rose just over 4% for the month. Then he compared all the "not up 4%" Januarys--that is, any other times when the S&P 500 rose less than 4% that month, or fell outright.
The results were interesting. Looking ahead three months (to the end of April), the market rose another 4.2% (on average) after a super-positive January, with 87% of the years showing at least some gain. Six months later, the rise was 8.1%. By year-end, the market averaged a 13.3% gain.
Now compare that to the sub-4% years--the respective gains during those time frames were 0.5%, 2.1% and 4.9%, with about 60% of occurrences showing some gain.
As you probably know if you've read my musings for a while, I'm not a huge fan of these types of studies. They sound great but at the end of the day, the market is going to do whatever it's going to do. That said, I do think a study with this many data points (23 of them) has some merit, and fits in well with what we're seeing play out in the actual market--that the bulls are taking control after many months of choppy, sideways, news-driven action, and that's likely to continue in the months to come.
All the best,
Michael Cintolo
Editor of Cabot Market Letter
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