Secular market cycles are produced by gradual changes in economic fundamentals such as inflation, deflation and price stability. These fundamentals are key to the earnings performance of corporations, and their earnings are key to the price performance of their stocks. Ed Easterling of Crestmont Research states: "Secular bulls occur when P/E starts low and ends high over an extended period. Secular bears occur when P/E starts high and ends low over an extended period." Cyclical markets are interim, transitional, reactive phases within secular market cycles.
1. Study market index price charts covering the period of time from 1900 through the present. There were three secular markets during the 20th century. The first ran for 263 months from 1906 through 1929. The second spanned 350 months from 1929 through 1937. The third began in 1968 and ended in 1987 after 289 months.
2. Evaluate the geopolitical and economic events of those times in relation to their effects on commodities prices, currencies and consumer buying or saving behavior. Understand the forces at work by asking yourself how money flowed into and out of the economy, and what that flow of money did to the earning power of corporations.
3. Note technological changes such as the automobile, electricity, telephone, television, mainframe computers, medical advancements, the space race, personal computers and so on. Include hydroelectric projects such as the Tennessee Valley Authority, the California Water Project, and other infrastructure projects such as freeway systems and affordable air travel.
4. Apply patterns of expansion and contraction, Federal Reserve monetary policy, international trade and shifts in industrial sector dominance or the emergence of new industrial sectors to the current economic and market climate. Many analysts believe that in 2000 we entered another secular market cycle.
- Secular bear markets begin when optimism about the future results in high P/E ratios. This means that the market price of a stock, divided by that company's earnings, is high because it expects future earnings to continue to grow. Optimistic investors will pay more for a stock, on a relative basis, the longer its earnings growth continues to be strong. There always comes a time, however, when the forces that supported strong earnings growth are not adequate to the task of continued growth.
- Secular market cycles are more a result of cause and effect than psychological factors. Market psychology creates a temporary cyclical market. Secular market cycles evidence major fundamental change. Cyclical markets are expansions and corrections based on technical market forces.
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