If you’ve spent any time at a cottage this summer, away from the bright city lights, you’ve probably enjoyed some beautiful views of the Milky Way. Astronomers believe that our galaxy is a barred spiral, with several arms radiating from the center, but they don’t know its exact shape. The reason is simple: you can’t see a galaxy’s structure when you’re in the middle of it.
Before you think you’ve accidentally wandered onto an astronomy blog, there is an investing lesson in my celestial musings. Just like you can’t make out the shape of a galaxy unless you can view it from a distance, you can’t identify a long-term pattern until after it’s over. That’s why it’s frustrating to keep reading that we’re in a “secular bear market” that began in 2000, most recently in the Financial Post this week. The fact is, we don’t know what kind of long-term market trend we’re in because, like an astronomer gazing out at the Milky Way, we’re looking at it from the inside.
What is a secular trend?
Let’s clarify some terminology before we go further. A secular bear or bull market is a prolonged trend of falling or rising stock prices, lasting about five to 20 years, though there’s no strict definition. Within a secular trend, there may be a number of shorter cyclical bear and bull markets.
According to Crestmont Research—the firm that’s leading the “we’re in a secular bear market” refrain—there were eight prolonged trends between 1901 and 1999. A ninth (the fifth secular bear) began in 2000. I have no argument with that start date. The problem is, we don’t whether the trend is over yet.
It’s quite possible that we’re now almost three-and-a-half years into a secular bull market that began in March 2009. The global markets, as measured by the MSCI All Country World Index, are up more than 83% since then. If stocks continue to deliver positive returns for another couple of years—the index is up over 3% year-to-date, despite the constant gloom—we will look back and say with certainty that 2012 was the middle of a secular bull. And if the next few years see more downturns, then we’ll know the secular bear is still with us.
Was 2007 a bull or a bear?
To understand this point, think back five years from today. We know now that in 2007 we were still in the secular bear market that began at the turn of the millennium, but no one could have known that at the time. Investors had enjoyed excellent stock returns since 2003, and unless you knew a global financial crisis was looming, there was no reason to say that 2007 was anything other than the fifth year of a roaring bull market. It was only after the post-Lehman meltdown that we could say that 2000 through early 2009 comprised a long-term downward trend.
Arguing that we’re in a secular bear market today implies that you can forecast the future: it’s no different from predicting an imminent market crash, or at least many years of dismal returns that would erase the gains we’ve made since 2009. Indeed, the Financial Post piece that ran this week was headlined “Another decade of low returns ahead.” Market gurus may earn a comfortable living making 10-year projections like that, but unfortunately, investors who listen to those forecasts are inevitably disappointed.
Investors should accept that long-term trends can only be identified after they’re over, so the wise course is to stay invested at all times and rebalance regularly. That’s the only way to ensure you won’t be watching from the sidelines when the next secular bull market finally reveals itself.
Ah.. but surely the next secular bull market can’t reveal itself – until after it’s done!
Writing articles like the one you mention in the Financial post must be a lot of work. Perhaps we could get some programmers together to write an article generator that takes the past 10 years of stock returns and creates “content”. I’ve suspected for a while that this is what is done with the daily market wrap-ups that purport to explain the rise or fall of stock prices each day.
Dan, could you comment on the validity of the P/E multiple analysis in the Financial Post article? Thanks.
@Michael: You’re so cynical about the financial media. :)
@Pat: Not surprisingly, when you look back at long bull markets, you can see they usually started during a period when stocks were cheap (low P/E multiples). The analyst in the article is commenting on today’s valuations and saying stocks are not cheap. But why isn’t he looking back to March 2009, when P/E multiples were well below their historical averages and identifying that point as the start of a bull market?
The article says market bottoms typically see P/Es below 10, and I believe in US they were around 13 in March 2009. In Europe they are around 13 today. Do you want to wait until they go below 10 before investing? What if they don’t get there?
I am not saying that valuations don’t mean anything. The problem has always been that it’s very hard to act on this information and achieve market-beating results. When you look back on the turning points, they all look obvious. But they are never obvious when you are living through them.
Dan, that was an excellent article! Thank you.
Dan, great post. I like the galaxy analogy. I was reading “investors’ 10 common mistakes” by Barry Ritholtz the other day, all of the mistakes he mentioned make sense and should be avoided but one “Not understanding the long cycle”, when I was reading that, my question was how do you know you are in a long cycle”, he was talking secular bull/bear markets. Your post answers that question, you can’t until its over.
Excellent article again Dan. Thanks!
Great analogy and a great post! At the end of the day, whether you prefer indexing or dividends, or a combination thereof, if you believe you can predict the market you are deluding yourself. Considering we are apperantly in some type of “secular” market, I’m pretty pleased with the results. :)
I’m also guessing the same people who felt bonds were a bad investment for the last 5 years, are also proponents of the secualr bear market.
Nice job on editing the new book (which I will be doing a giveaway for this weekend)
@The Dividend Ninja: Why not just buy an index of dividend stocks? :-P
@Ninja: Thanks for the comment. What, you’re not “waiting for things to settle down”? Also known as “waiting for prices to get much higher”? :)
@Maxwell C. Why not just buy ZDV rather than a portfolio of dividend stocks?
An interesting question! Just like there are investors who prefer ‘green companies’ so there are investors who can’t stomach owning companies such as tobacco or alcohol manufacturers! ZDV for example forces you to own a movie conglomerate which makes you money selling an increasing volume of ‘R’ rated movies which for many people is offensive. So, unpacking ZDV and buying a representative sample omitting such companies makes sense. I mean do you really need to own all the financials?
I’ll write a post on it instead of hi-jacking Dan’s comments. ;)