Secular Market Cycles – Fact or Illusion? by Theodore Wong
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Conventional wisdom dictates that equity markets adhere to long-term secular cycles and that investors should adjust their allocations based on whether valuation metrics, such as the Shiller CAPE, are relatively high or low. But what if the notion of secular market cycles is misguided because, for example, the sample size of past cycles is insufficient to attach any statistical significance?
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I have been a student of the stock market for over 40 years. I rarely heard the term “secular market cycles” before the 1970s. In 1991, Angus Maddison used the term “long waves” to describe economic activities in 16 advanced capitalist countries since 1820. The term “secular cycles” has gained popularity since 2000 when Robert Shiller published the first edition of Irrational Exuberance. Figure 1 is taken from page 8 of his book, which shows the now famous Shiller CAPE (cyclically adjusted price-earnings ratio). Shiller’s chart featured four major tops from 1881 to 2000. The last peak was spot-on in nailing the dot-com bubble.
Many believed that Shiller had deciphered the incoherent S&P 500 chart into a comprehensible rhythmic waveform with CAPE.
Secular Market Cycles
Since then, the notion of “secular market cycles” has been increasingly accepted as an undisputable fact in both academic research and investment circles. Experts are busy giving meaning to such cyclical patterns. They rationalize causal connections between secular market cycles and socioeconomic shifts and attribute those cycles to structural factors such as technological advances, demographic waves, inflation trends, political reforms or wars.
The problem arises when analysts advise clients to deploy different investment strategies depending on whether the current phase is a secular bull or bear market. In order to know which strategy is appropriate, investors must first identify where they are in a secular market cycle. Unfortunately, the same experts who can explain past cycles are in total disarray regarding the current cycle. Since 2010, analysts have been debating if the secular bear market that started in 2000 is still in place or if a new secular bull market has already begun. During their six-year debate, the S&P 500 has melted up over 200%.
A deep dive into the secular market debate
Are we currently in a secular bull or secular bear market? You can find experts with a wide dispersion of opinions –– the bearish camp, the bullish camp and those on the agnostic fence.
Leading the bearish camp are many renowned analysts who believe that the secular bear market started in 2000 continues today. Members include Ed Easterling, Michael Alexander, John Hussman, Jeremy Grantham, John Mauldin, Russell Napier, Joseph Calhoun, Van Tharp and Martin Pring (who might have turned bullish recently). Many of them justify their bearish stances with only one or two secular cycles of data supported by anecdotal evidence. Easterling and Alexander extended the database to over a century but could only increase the number of cycles to four or eight.
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