In a previous discussion about the battle royale between fundamentals and technicals, a reader challenged the idea that we are in a secular bear market by asking for a definition. That sounds like an interesting intellectual exercise so I’ll put some thoughts together and share them with you next week.
In the meantime, it is a nature of the financial markets to ebb and flow in cycles. For the purpose of orienting ourselves properly then it is important to be able to recognize whether the major trend is up or down. The most widely recognized cycle for equity markets is the 18 year secular bull and bear cycle.
This back and forth pattern of advancing and declining stock prices dovetails with the declining and advancing prices of raw materials. As resources become more expensive, they eat into the profits of companies and as they become cheap, they margins grow fatter.
- major trends are defined by lows and highs
- the trend is rarely ‘clean’ but moves 2 steps forward, 1 step back
- this dance is called a ‘bear market rally’
- the phases are recognized and annotated in hindsight
- definitively labeling a market requires that we wait and be late
- 16, 17.6, or 18 years? depends on how you look at it
- if the secular bear started in 2000 then it will end in 2016-2018
- this is a map but remember, a map is not the territory
- we are smack in the middle of the ‘lost decade’ highs and lows
- 1920-1940’s was a wild ride still unparalleled as of yet
- difficult to classify the 1920-1940 market because of volatility
- secular bear markets grind down almost all previous gains down to nothing
- for today’s market that would mean the Dow Jones Industrial at 5000
- yet, the lows are still slightly higher as are the highs
Zooming back into the chart, here is a look at just the largest bear market rallies:
Source: Chart of the Day
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