Understanding Secular Market Trends
By John Sammut and RBC Wealth Management
Financial markets tend to exhibit long, violent and often misleading "boom and bust" cycles. Our investment memories are short-term at best, and human intelligence has a tendency to extrapolate the events of recent history into the infinite future. Given the lessons taught by the market collapse in 2008, it is wise to study and gain an understanding of market history so that you can begin to create a path to personal economic recovery. A good starting point to move proactively forward is to look closely at "secular market trends".
Secular bull market
A secular bull market reflects a long period, often 10 years or more, where an asset class makes significant advances over time. Although the long-term price trend is higher, there can be powerful, short-term declines during these periods, known as cyclical bear markets, which are followed by further advances to new highs. The "Crash of 1987", where the major stock markets fell by 25 percent in a single day, is a classic example of a cyclical bear within a secular bull. Those who bought stocks during and after the ’87 crash were rewarded handsomely as we were in the midst of the greatest long-term bull market in history.
Secular bear market
A secular bear market reflects a long period, often 10 years or more, in which a particular asset class makes little progress over time. A secular bear basically begins when an asset class declines at least 20 percent over the course of at least two years. The fall is then followed by a long hangover that drags on as previous excesses are purged, and new highs are not reached for many years, perhaps decades. There can be powerful, short-term advances during these periods, known as cyclical bull markets, which are often followed by further declines to lower levels.
It appears that U.S. Stocks are currently in the midst of a secular bear market that began in 2000. The recent rally which began in March 2009, where stock markets advanced 40 percent from their lows, may well be a cyclical bull market within a secular bear. It is also worth noting that U.S. Government bonds are coming off a 27-year secular bull market that began in 1981.
Investment strategies that work well in secular bull markets are typically not effective in secular bears. Many great fortunes were made during the secular market declines of the last century, but to thrive during this bear will require a different strategy. Alternative strategies to consider include sector rotation, non-correlated assets, and tactical asset allocation. One should be prepared emotionally and financially for significant volatility, and cash reserves should be kept on hand to take advantage of investment opportunities that surface during precipitous declines. Be prepared to "buy on weakness" and "sell on strength," and be willing to change course on short notice.
John Sammut helps individual investors, families and corporations protect their purchasing power and improve investment results. You can reach Sammut by telephone at (800) 343-3036, or visit him at www.johnmsammut.com
The opinions expressed in this report are those of the author and are not necessarily the same as those of RBC Wealth Management or its research department. RBC Wealth Management did not assist in the preparation of this report and makes no guarantees as to the accuracy or the reliability of the sources. This information should not be construed as a research report, as it is not sufficient enough to be used as the primary basis of investment decisions. Clients should work with their financial consultant to develop investment strategies tailored to their own financial circumstances.
RBC Wealth Management, a division of RBC Capital Markets Corporation, Member NYSE/FINRA/SIPC
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