Most stock market participants fail to consider the big picture. They are either unaware of secular cycles or they discount their existence. Instead, they view cyclical bull and bear markets as the driving forces behind long-term price movements, basing their investment decisions on the perceived direction of the current cyclical trend.
Unfortunately, the accurate evaluation of the investment merit of a given asset class requires a minimum time frame of ten years, so secular cycles must be considered by any strategy that is focused on the long-term. With respect to the stock market, we are currently in the middle stage of a secular bear market that began in 2000.
The identification of a stock market secular context and inflection points can be accomplished through careful study of fundamental, technical, internal and sentiment data. For example, our Secular Trend Score (STS) has correctly identified every secular turning point since the market crash in 1929. The following graph displays the long-term view of the STS along with the last four signals.
From an investment perspective, secular bull markets are much easier to navigate than their bearish counterparts. A simple strategy of investing heavily in stocks at the beginning of the secular uptrend and then buying the subsequent dips will produce excellent average annual returns during the 10 to 20-year lifespan of the bull move, especially if all dividends are reinvested and allowed to contribute to compounding. On the other hand, secular bear markets are characterized by violent cyclical swings higher and lower that engender equally violent swings in mainstream sentiment.
The average investor has a tendency to keep moving in and out of the stock market, usually giving up hope near cyclical lows and becoming euphoric near long-term highs. Overall, the stock market performs very poorly during complete secular bear cycles. For example, during the 12 years since the current secular bear market began, the S&P 500 index has produced a compound annual return of only 0.8%, which assumes the reinvestment of all dividends along the way.
Of course, there are many opportunities to profit from during the violent cyclical swings, but it is important to recognize that these are trading opportunities only. Again, a minimum time frame of ten years is required to evaluate investment merit. Cyclical trends typically have durations of two to five years, so they are too short to provide properly characterized investment opportunities. Any market analysts who have suggested that stocks were an excellent "investment" any time during the last 12 years were either ignorant of the secular context or did not have a full understanding of investment merit.
Although the secular bear is extremely difficult to navigate psychologically, there are sound investment strategies that outperform the stock market by a wide margin and require very little monitoring and maintenance. For example, our model investment portfolio, which was created just before the start of the current secular bear, has produced an annual compound return of approximately 11% since inception.
This performance was obtained by recognizing the secular shift in 2000 and then positioning for the development of a 10 to 20-year bear market by investing primarily in high quality bonds, commodities, precious metals and currencies. The lesson is simple, but powerful. Secular bear environments are very different from their bullish counterparts, as are the investment strategies required to maximize potential returns and minimize risk in each environment.
Therefore, in order to invest successfully over the long run, it is imperative to properly characterize and understand secular context. Although it is often difficult to maintain focus on the big picture, it is the key to amassing investment wealth consistently over time.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.