SECULAR BEAR TRENDS

STUDY OF EARLIER SECULAR BEARS... Last Friday, I wrote that any bull market at the current time would most likely be "cyclical" as opposed to "secular". I'd like to elaborate on that distinction. Secular trends are very long term in nature and can last for decades. The last bull market from 1982 to 2000 was certainly secular. Cyclical trends are shorter in nature and represent corrections in the secular trend. The bear markets of 1987, 1990, and 1994 were cyclical in nature. In my 2004 intermarket book, I wrote that the 2000 collapse in stock prices ended the two decade long secular bull market in stocks and that a new secular bear market had started. I also wrote that "bull markets can take place during a secular bear market. However, such bull markets are cyclical in nature. As a result, they tend to be shallower and shorter than cyclical bull markets that take place during a secular bull market" (Intermarket Analysis, page 151). I also pointed out in that earlier text that the last two secular bears took place during the 1930s and the 1970s. Let's compare them to see if there are any lessons to be learned about the current situation.

THE SECULAR BEAR OF THE 1930S ... Chart 1 shows the secular bear market that started in 1929 and bottomed in 1932. That would seem to suggest that bear market lasted only three years. That, however, is open to interpretation. After rallying from 1932 to 1937, the Dow fell for the next five years into 1942 and lost half of its 1932-1937 rally. Stocks turned up again in 1942 but didn't exceed their 1937 peak until 1947 (ten years after that earlier peak). They didn't exceed their 1929 peak until 1954 (25 years later). It could be argued that the years from 1932 to 1942 represented a decade-long bottoming process in the stock market. That would put the final bottom 13 years after the 1929 top. A study of that earlier secular bear market showed that market bottoms during (or after) secular bears usually take a very long time to form. The secular bear during the 1970s took a very different shape.




SECULAR BEAR DURING THE 1970S WAS FLAT ... While the deflationary 1930s saw sharply falling stock prices, the inflationary 1970s trend was essentially flat. That period is shown in Chart 2. The Dow Industrials peaked in 1966 and traded in a huge sideways fashion until 1982. This difficult period lasted 16 years. The worst loss was suffered in 1973 and 1974 when the S&P 500 last half of its value. It wasn't until 1982 (eight years later) that stocks began another secular bull trend. Chart 2 shows several cyclical bull markets taking place during the 1970s. But they took place within a 16-year period of a flat secular trend. That demonstrates that secular bear markets don't necessarily entail constantly falling prices. [In constant dollar terms adjusted for inflation, however, the inflationary 1970s were almost as damaging as the deflationary 1930s]. It's hard to say which of those two earlier models fits the current situation (or if either one does). One thing does seem clear however. Secular bull markets are usually followed by secular bear markets which can last a long time. If 2000 marked the end of the last secular bull, we've been in a secular bear for nine years.




THE DECADE AFTER MARKET BOOMS ARE NOT VERY GOOD ... That headline is taken from my earlier intermarket book and was written in 2003. I thought it might be interesting to quote some of the conclusions that were written at that time: "The reason for our examination of these prior eras is to demonstrate that the decade (or two) after the end of a stock market boom is usually characterized by relatively trendless action. That does not bode well for the coming decade...The important thing is to recognize that the next decade will probably look much different than the last two decades...It will require a different philosophy, a different set of tools, and a different time horizon...The "buy and hold" approach that worked so well over the past 20 years is not going to work as well...Bull and bear markets will be shorter in duration...Successful investing is going to require more skill at market timing". The S&P 500 trend in Chart 3 certainly seems to have fulfilled that dour forecast in the years since 2000. That's why it's important to understand the nature of long-term secular trends and the role shorter-term cyclical trends play in those longer trends. And why I believe a bull market at the current time may be more "cyclical" than "secular".