One very consistent problem with Seeking Alpha authors (including yours truly! my mirror is working...) is our tendency to use a financial or technical phrase without carefully defining it. How many times have you read about a stock market "bubble?" Has anyone defined the term for general use, or in the article they wrote? Even nobel prize winner Robert Schiller didn't do it here.
Another term often bandied about is "secular bull market." What does this mean?
I will be more precise and distinguish between a cyclical and a secular bear market. Later in the this article I will provide reasons, and some proof, that we are in a new secular bull that began in the spring of 2009 and will probably last well into the next decade.
First, the definitions:
- a cyclical bull market is a period of rising stock prices lasting several years and occasionally longer, associated with an economic recovery, rising corporate profits, and improving fundamental data such as GDP.
- a secular bull market, in contrast, consists of a period of rising stock prices, often lasting a decade or more, associated with secular (thus the name) long term socioeconomic trends such as improving productivity, emergence of new industries and industrial structures, improved international trade and alliances, and better treatment of capital as a factor of production.
Keep in mind that a secular bull market can have several cyclical bear markets contained within it. Consider the example of the great secular bull from 1982 to 2000:
I believe the cyclical bull market that began in March of 2009 was the start of a new secular bull market that will extend well into the next decade. What socioeconomic factors are contributing to this growth?
- first, the advent of fracking and other drilling technologies have greatly increased the supply of fossil fuels (especially cleaner natural gas) and have sharply revised prospective energy costs downward.
- second, the advent of new medical technologies such as robotic surgery, as well as breakthroughs in molecular biology and patient tailored medicines, will cut costs, lengthen lifespans, and generate high paying careers, especially here in the US.
- internet based improvements in transportation---everything from better logistics, to mass transit in urban areas, self driving vehicles, and drone delivery---will radically slash the cost of transporting goods and people from one place to another.
I'll discuss more detail on these issues in future articles (as well in the comment section below).
Of course, secular bull markets are easy to point out looking backwards. How can I be so sure we are in one now?
Simple: The great technology bear market at the start of this century had one long term effect that only recently has abated: a major compression in PE ratios. (Other similar valuation ratios, such as price/cashflow show a similar pattern). Did you ever wonder why stock prices stagnated for years in the 2000s, even though the economy had several cyclical recoveries and corporate profits grew? The multiple attached to those earnings collapsed.
Until that process came to an end a few years back, stock prices were like a 90 pound weakling trying to row against the current.
I chose WalMart because, despite remarkably steady earnings growth throughout the past decade, the company's PE ratio collapsed from 40x to 10x, resulting in year after year of desultory stock performance: the hallmark of a secular bear market. In the last few years however this process has ceased and the PE has begun to recover: shareholders have enjoyed 60% gains since 2011, as well as pocketed a well covered dividend.
Much the same can be said of Johnson and Johnson:
I chose JNJ because instead of drearily falling as it did for years, JNJs earnings multiple has returned to, and held, in the high teens as earnings have recovered. Instead of being spooked by some profitability weakness in 2011-2012, investors seem to love the stock more than anytime in the last decade!
I could use other charts and examples: GE boasted a PE multiple of more than 50x at the turn of the century. By 2009, when the company's light bulbs cost more than a share of its stock, that ratio was 5x! Yet, even given the sluggish profit recovery and a dividend cut (horrors!) investors will now pony up 20x for the shares.
This is not to say some cyclical bear markets might not rain on my secular parade. But the secular winds are now blowing bullish; not just for the reasons above, but for some others I will discuss in future articles.
Disclosure: I am long XLE, XLK, IHI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am also short GLD