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.