One of my favorite ways to contextualize market trends is to go long in secular bull and bear markets.
When we look back over the past century, we see decades-long periods in which the economy was generally strong, supporting market trends, expanding manifold. We call these periods secular bull markets. The best examples are 1946-66, 1982-2000 and 2013 forward.
Alternative periods of time are secular bear markets: the economy is full of weakness, weak consumer spending and negative job growth. Weak corporate revenues and earnings; Equity prices go sideways, vicious rallies and sell-offs are common. Investors are willing to pay the same amount for one dollar of income.
No matter what we do in this secular market period, no market goes straight or down forever. Markets will move in the opposite direction of the dominant trend. During secular bull markets, we get cyclical bears; During secular bear markets, we get cyclical rallies.
Some are describing the current move off the June lows as a bear market rally. Two things must have happened for this to happen: 1) the secular bull market that began in 2013 has ended and 2) we are now in a new secular bear market.1
If you believe that the secular bull market of 2013 is still viable, then it is reasonable to claim that the first half sell-off was a countertrend cyclical bear in the context of a secular bull. This is generally supported by economic strength in the labor market, strong consumer spending and record high corporate profits.
The counter argument is that inflation has changed the dynamics of the economy. We should expect to see slowing industrial production, reduced consumer spending, increased layoffs, and rising unemployment as the Fed tightens its grip on inflation.
Generally, secular bull and bear markets are best characterized after the fact—something that allows for accuracy but is useless to investors. In real-time, you have to guess and place your bets.2
The question that determines how traders will want to position themselves in this position is what type of countertrend rally is it?
Cyclical rally in a secular bear?
Or recovering from a bear cycle in a secular bull?
Perhaps we can glean some insight from Brian Jordan, Nationwide’s deputy chief economist. Since the June low, we’ve seen 4 consecutive weeks of market gains (+16.7%) that have recovered almost half of the YTD losses. Jordan asks the question “How does the current assembly stack up?”
Taking a contrarian stance, he notes “the uptrend is still expected to be largely subdued – consider the coinage of the phrase “bear market rally” of late.”
But Jordan observes a key historical measure:
“Note that it has already outpaced the largest countertrend gains in eight of the last ten bear markets. The only bear market rallies in the last seven decades that were stronger than the last two-month rally were the 19.0%, 21.2% and 20.7% increases during the 2000-02 recession, respectively, and the 24.2% increase in the 2007-09 cycle. Every other rally of this magnitude that begins during this period represents the start of a new bull market.”
We won’t know for sure until after the fact but it certainly helps us understand this context better.3
in the past:
The end of the secular bull? Not So Fast (April 3, 2020)
Bull Market and P/E Multiple Expansion (June 22, 2018)
A Bull Market Can’t Begin Until a Bear Market Ends (March 9, 2018)
Redefining Bull and Bear Markets (August 14, 2017)
Are we in a secular bull market? (November 4, 2016)
Bull and bear markets
1. We discussed earlier why pandemic externalities were not the end of previous secular bull markets. look at it. That view was confirmed by subsequent moves in 2020 and 2021.
2. Unless you are a buy and hold investor like we are which means you ride the ups and downs of counter-trend rallies to benefit from long-term secular trends.
3. If I ignore Jordan’s warning I will do him a disservice:
“There are certainly fundamental reasons to be cautious. The Federal Reserve is still aggressively tightening monetary policy and, as a result, the risk of an eventual recession is still on the rise. As noted on several occasions in this space, however, the market has already priced in a fairly negative outcome. The S&P was down 23.6% from its peak in late spring and is still down 10.9% after a recent week’s rally. Historically, the index fell an average of just 7.6% during the pre-recession period.”