Throughout history the economy and markets have cycled through boom and bust periods and many have proclaimed that the circumstances surrounding each cycle are different. Since 2000, we have been in what we refer to as a "Secular Bear" market. This is defined as a long-term, overshadowing flat to downward trending environment. The one thing that makes this different for many is they have not experienced this type of environment as an "investor" and those who did have forgotten with the passing of time how difficult it is to navigate this type of trend. The last "Secular Bear" began in 1966 and ended in 1982. This set up the "Secular Bull" run from 1982 to 2000 where many investors made their easy money and are still in denial that it has passed with hopes of it rekindling in time to save their retirement. If we take a look and compare the last "Secular Bear" to our current environment we can draw similarities not only from an economic perspective but also from how the markets "behaved" during these grand trends.
1966-1982 or 2000-Present?
-The country was in the midst of a long-term "war/conflict" in another country
-Banks broadened their lending powers and rushed into real estate lending, speculative lending and other ventures causing many to fail as the economy soured
-This period saw record low interest rates
-This period saw 9%+ unemployment rates
-Key industries, including housing, steel manufacturing and automobile production experienced a significant downturn.
The list of similarities could go on! If we shift gears and look at how the stock markets reacted during these periods of time we can see that the similarities continue. "Secular Bear" environments have historically been characterized as sideways, choppy, big swings to the up and down and a general negative feel. However, within all overshadowing "Secular" trends, both bull and bear, shorter term "Cyclical" cycles occur. These are defined as 2-5 year bull and bear market cycles that occur within the grander trend. The difference between a Secular Bull and Secular Bear environment is that the Cyclical bear phases within the shadow of a Secular Bear have proven to be longer and deeper versus being in the shadow of a grand Secular Bull. The table below compares the Cyclical Bear phases that occurred within Secular Bear environments to the Cyclical Bear phases during the most recent Secular Bull. Note the longer duration and greater decrease in market value during Cyclical Bear phases when a grand Secular Bear trend is present.
Cyclical Bear Phases Cyclical Bear Phases Cyclical Bear Phases
1966-1982: 1982-2000: 2000-now:
(Within Secular Bear) (Within Secular Bull) (Within Secular Bear)
-1st -32.9% over 1.58 years -1st -30.2% over .25 years -1st -46.3% over2.08 years
-2nd -46.2% over 1.75 years -2nd -15.8% over .42 years -2nd -52.6% over .83 years
-3rd -19% over 1.17 years -3rd -15.6% over .17 years -3rd ??
-4th -21.3% over 1.33 years
The Secular Bear from 1966-1982 produced a .83% cumulative return for the Dow Jones during the entire period. The previous one (1929-1954) saw a 1.25% return and since 2000, the S&P 500 is down roughly -19%! The silver lining is that there is opportunity to make money during these periods of time that historically have produced little to no return. With each Cyclical Bear that occurred there was a Cyclical Bull that preceded it where the market went up and in many cases, up considerably. See below.
Cyclical Bull Phases 1966-1982: Cyclical Bull Phases 2000-present:
-1st +62.5% over 2.5 years -1st +90% over 5.08 years
-2nd +69.1% over 2.25 years -2nd +44.78% currently in 1.9 years
-3rd +56.3% over 3.08 years
As you can see, its not as if the markets never went up, but they also came down significantly, not allowing many investors to make up the difference before the next Cyclical Bear correction. The opportunity to make money in the equity markets during a Secular Bear environment is to take a tactical approach that participates in the Cyclical Bull runs and protects investment capital by exiting the markets during the Cyclical Bear contractions. Many investors are frustrated with their portfolio performance since 2000 and are looking for answers on how to succeed in this environment. Understanding that the markets have entered into a different cycle and adjusting portfolio strategy is a critical step; but also understanding that market conditions are similar to what we have seen in the past will help weather the storm we are in the midst of.
