While it is true in the very long run stocks go up, it is also true that secular bear markets are a fact of life. These dangerous extended periods where inflation adjusted stocks underperform can last 10-20 years or more. How many of these challenging 20-year periods do you have in your investment lifetime? How can you identify them and prepare a successful gameplan to navigate the cyclical ups and downs?
A byproduct of the record monetary and fiscal stimulation that took place between 2020 and 2021 has been rampant speculation in financial markets. That frothy behavior has extended from housing through to technology stocks, SPACS, NFTs and of course crypto. In the early phase of the 2022 equity decline we held the view that the secular bull market dating from 2009 was likely intact and that a further up leg to the post 2009 secular bull market possible. We therefore assumed that the decline represented a counter-cyclical correction in an on-going secular uptrend, rather than a pro-trend primary bear under the context of a secular bear market.
The distinction is incredibly important because primary trend bear markets that develop under the context of a secular bull environment are almost invariably contained in either magnitude (15 - 25%), duration of 6 to 9 months, or both. This compares to the typical 40 - 60% loss over 15- to 24-months when the secular movement is bearish. At Pring Turner, we call the former “burglars”, because they have the effect of temporarily hurting portfolios. The latter are named “bank robbers” because their effect is far more pervading. The current primary bear market at around -20% has yet to exceed the burglar range in either magnitude or duration.
However, some of our indicators monitoring secular trends have either moved into the bearish camp or are right at its doorstep. Complicating matters is the fact that many intermediate term indicators are calling for a summer rally. If a secular regime change does happen, a flexible strategy will be needed to survive and even prosper in a highly cyclical environment. Previous secular bear market experiences show that passive investing offers totally inadequate results.
Secular Trends and Inflation/Deflation Excesses
All secular bear markets are characterized with a long-term (10- to 20-year) decline in inflation adjusted stocks. These pervasive negative trends are almost always caused by elevated price inflation, but parts can also be characterized by excessive deflation, as in 1921, 1929 - 1932 and more recently the late 2008 early 2009 part of the financial crisis. These unusual swings in inflationary and deflationary forces reflect longer-term structural problems, which is why secular price movements typically extend between 10 to 25 years. This point can be appreciated by observing the plethora of recessions that develop during the (shaded) secular bearish periods in Chart 1 and their paucity post 1900 in the unshaded secular bulls. Even those recessions that develop under the context of a secular bull are generally mild; 1960 and 1990, or brief, as in 2020. Because of the length of these very long-term price movements, it’s usually only possible to spot reversals several years after the final turning point. Citing a reversal within 5 months of a possible (January 2022) high with any degree of certainty, is therefore pushing the envelope somewhat. Another difficulty arises from the paucity of data points.