Understanding what ushers in and sustains a secular bull market, the most powerful and long-lasting force in equity and commodity markets, eludes many investors (and it shouldn’t). Investors have fingertip access to all the data they need in order evaluate one hundred years of secular forces. Failing to evaluate historical data can make it very difficult to determine the likelihood, or direction, of long-term trends in the equity and commodity space.
Secular Market definition:
“Secular markets are typically driven by large-scale national and worldwide events, which occur in combination. For example, wars, demographic/population shifts and governmental/political policies are all events that could drive secular markets.”
– Investopedia
Key fact: Cyclical markets, either bull or bear, occur within secular markets and usually last for a period of months or a few years. Secular markets last for about 16 – 20 years.
Secular Bull Market | A Quick History on US Equities
Major US stock markets have been in a secular bear market since 2000, which was preceded by a 18-year bull market from 1982-2000. That secular bull market (1982-2000) was preceded by a 17-year secular bear market (1965-82). That bear market was preceded by an incredible secular bull market from 1942 to 1965.
While those years may seem like ancient history, the market has always mirrored itself with similar patterns. And anyone who ignores the past, does so at his or her own peril; investors included.
Over the past 100 years, secular markets have operated in a relatively orderly fashion, trending back and forth between 16-20 year bear and bull markets. As investors, the trick is to determine when the switch occurs so that you can spend the majority of the move invested on the right side.
Key fact: Commodity secular bull markets typically take hold during secular equity bear markets, which we’ve witnessed since 2000.
Knowing whether or not the markets are in a secular bull or bear is all important. Its impact can be seen in the charts below. For demonstration purposes, we’ve decided to use the Dow Jones Industrial Average, due to its long history.
Dow Jones Industrial Average, 1942-1960 Secular Bull: 400% increase after adjusting for inflation
Dow Jones Industrial Average, 1960-1980 (secular bear market began in 1965 and went until 1982): -37% loss after adjusting for inflation
Dow Jones Industrial Average, 1982-2000 Secular Bull: 905% increase after adjusting for inflation
Dow Jones Industrial Average, 2000 to present Secular Bear : -3.5% loss after adjusting for inflation
Secular cycles are easily identified when spread out over decades. As US equities begin to pull back from all-time highs, it seems timely to highlight the critical flaws associated with the recent idea that American stocks are back in a secular bull market.
US Equities Secular Bull Market Premise
For US equities to be back in a new secular bull market, the bottom would have to have occurred in March of 2009. This would mean that the secular bear market, which started in 2000, only lasted nine years. A nine year secular bear market (2000-2009) would be unprecedented as there has never been one that short in 100 years (typically lasts around 16 years). Even if the markets were to begin a new secular bull market today, in 2013, it would mark the conclusion of the shortest secular bear market in history. The naysayers to our data will point to the Dow hitting all-time highs recently. However, the reality is that, adjusted for inflation (2.5% annually), the Dow Jones is down from its 2000 level of roughly 11,700.
What the US Economy Doesn’t Have:
Major Growth in Manufacturing: This sector has led many US secular bull markets. Manufacturing data has been improving of late, but the US continues to report billions in trade deficits every month as exporters fail to gain market share.
High Rate of Saving: There is little saving going on in America. Those who do save are punished as interest rates remain near historic lows and the Fed injects billions into the economy out of thin air. Without savers there is slow start-up growth (important driver for secular bulls). In addition, Main Street has almost completely missed the rally in stocks from 2009. Sadly, just in the past 6 months, as equities hit all-time highs, Main Street has begun wading back into the markets (likely to be set up for another crash).
Low Debt Levels: Low debt levels allow for increased spending and borrowing (to make investment). This is another needed component for the US economy, and its consumers, if a secular bull market is to take hold. Regretfully, the US government is drowning in debt and so are its citizens. Low debt levels is a necessity prior to sustained secular bull markets.
Two Sides to the Coin
An important fact to remember is that whenever there is a secular bull market in equities, there is almost always a bear market in commodities, and vice versa. Hence the importance of understanding whether we are in a new secular bull market – or a continued secular bear market – for US equities.
In late 2012, we went against the grain and published an article titled, Why the Commodity Super-Cycle Will Survive 2013.
On Thursday, August 22nd 2013, Scotiabank came out and said that it sees an end to the commodity correction which began in April of 2011. It expects a renewed rally in commodities to take hold in 2013. Commodity prices are still down some 15% from April 2011, but have been making positive moves of late.
Scotiabank’s Commodity Price Index shows that prices jumped 4.1% month-over-month in July. The index is now up 1.2% year-to-date. Indeed, the commodity supercycle is surviving 2013.
Patricia Mohr, Scotiabank’s commodity market specialist, stated that, “While it is too early to say that commodity prices have bottomed, the correction – linked to austerity-led recession in the southern euro zone, a sub-par U.S. economic recovery and new mine supply commissioned in a lacklustre global economy – could be largely over later this year.”
While Mohr is of the mind that the biggest factor supporting commodity prices this year will be renewed economic growth, for us, it is inflation.
Our confidence in commodities lies in the fact that the ongoing government debt supercycle makes it very unlikely the markets will avoid another significant cyclical bear market before a true secular bull market can take hold. We believe the next secular bull market for stocks will begin in late 2015 to early 2016.
In an effort to buoy the stock market and real estate market, which is already showing signs of cooling amidst higher interest rates, the Federal Reserve will continue to do what it does best; it will aggressively pursue debt monetization.
The conclusion of the cyclical bull market, and resumption of the secular bear market in US equities, should favor gold, commodities and commodity based equities in the quarters ahead.
On Thursday, gold closed above its 100-day moving average for the first time in 2013. The precious metal was up over $22 an ounce Friday to $1,398.38. Friday’s rebound above the 100-day moving average should not be taken lightly, as similar moves over the past decade have signaled prolonged rises in price (click here to read our report last week titled Silencing the Gold Bashers).
With the US debt ceiling beginning to steal headlines, and Germany confirming Greece will more than likely need yet another bail out, look for gold to rally and US equities to give back some gains as we head into September.
All the best with your investments,
PINNACLEDIGEST.COM
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