WASHINGTON – After an outburst of irrational, bullish exuberance Wednesday, Mr Market seems to have returned to its apparently customary 2022 bear mode. So nearly a full calendar quarter into the New Year, we have an important question? Are we now in a cyclical or a secular bear market? Bonus question: Is the real-life James Bond-style super-villain currently running the Soviet Union Russia making things even worse on Wall Street?
First of all, for those investors new to the game, let’s zip over to the invaluable Investopedia to make sure we’re all on the same page when discussing bulls and bears and secular and cyclical market cycles.
Bulls and bears
Most people know the difference, but just in case… A bull is an institution or individual investor who invests like a cockeyed optimist, buying promising stocks like the dickens, convinced most of them will go up and enable him to profit.
A bear is just the opposite, an institution or individual investor who either dis-invests in the market by dumping stocks. Or, more radically, who despises certain stocks or the market itself to the point that he sells shares or index funds short. I.e., borrows stocks, sells them and collects a profit by buying them back when they go down. Assuming his guess is the right one.
Perma-bulls and Perma-bears are both extreme varieties of the above. Nothing, not even reality, can sway these investors from their always optimistic or always pessimistic points of view.
Markets, taken as a whole, can possess strong bullish or strong bearish tendencies. These can shift from time to time, and it’s often tough to figure out when the market tone shifts one way or the other.
Secular markets and market trends
Here’s how Investopedia defines secular and cyclical markets.
“A secular market is a market that is driven by forces that could be in place for many years, causing the price of a particular investment or asset class to rise or fall over a long period. In a secular bull market, positive conditions such as low interest rates and strong corporate earnings push stock prices higher….
“A cyclical market is shorter in duration than a secular market and often occurs during seasonal or cyclical business trends.”
“A secular bull market has positive conditions such as low interest rates and strong corporate earnings that bolster equity markets.
“Secular bear markets exhibit selling pressure within equity markets over an extended period, which might be due to economic weakness.”
Recent examples:
We now clearly see that the lengthy negative investment period leading up to the Great Recession and continuing through about 2010 was a secular bear market. I.e., it lasted a long time, with only occasional rays of sunshine throughout its duration.
On the other hand, the awful market crash that launched in March 2020 and persisted for roughly 6 months before recovering was a cyclical bear market. It essentially interrupted, albeit briefly, the long term (secular) bull market that persisted throughout much of the Trump presidency. This secular bull market resumed its march upward late in 2020, choked a bit, then continued running. Until now.
Since the first trading day of January 2020, nearly all stock market sectors have endured a continuous pounding, with precious metals and some resource stocks moving counter trend and with tech stocks, bullish for years, singled out for the most vicious selling.
Things have been so bad for nearly the entire Q1 2022 period that investors need to ask themselves: Increasingly, this doesn’t seem like a cyclical bear market. It’s beginning to look and feel more like a secular bear market. So which one is it?
We need to choose one answer
That’s not a trivial question. In a cyclical bear, bulls can selectively load up on perfectly good but temporarily beaten-up stocks, confident that soon, the secular bull market trend will reassert itself transforming any distress-sale buys into above average gains.
But using this “buy on the dip” tactic in a secular bear market only leads to bigger and bigger losses, since, after every new buy, everything goes down even more when the secular bear reasserts itself.
We are at such a period right now. US and world markets have been in an essentially bearish mood all year thus far. And, with the tech-heavy NASDAQ having already exceeded losses exceeding 20% at this average’s lowest point, we already have seen the more or less “official” definition of a tech bear market occur. Namely, a loss in a given stock, sector or average of 20% or greater.
I haven’t had time to check the total negative percentages on the Dow or the broader-based S&P 500, but neither of them look very positive either at this point.
When do markets turn from bullish to bearish, particularly in the secular sense?
Again, Investopedia gives us some clear insight. I’ve juggled a few of the paragraphs in this entry to track better with my current train of thought on this issue.
“[A] bear market represents a backdrop of pessimism, fear, and the expectation that economic growth and the markets will decline in the future. In the stock market, a bear market is typically consistent with a 20% decline in stock prices.
“In a secular bear market, where flagging corporate earnings or stagnation in the economy leads to weak investor sentiment, stocks experience selling pressure over an extended period of time.”
Currently, in 2022 thus far, one more trait can move what seems to be a cyclical bear market into a secular bear.
“Secular markets are typically driven by large-scale national and international trends, which could occur in tandem. The markets, including stocks and bonds, move in trends over the years.”
Let’s briefly tic off some of Investopedia’s boxes here.
2022 has been consistently bearish thus far. Currently, given Joe Biden’s throttling of American energy independence (an imposed but large-scale national trend) and the current, ongoing Russian invasion of Ukraine (an unwelcome yet unsurprising international trend, caused in part, by Russia’s perception of Western weakness) continue to unfold in tandem. The results: increasing damage to international industrial supply lines. And a massive increase in energy prices with no offsets (due primarily to US government policy), which further exacerbates the massive inflationary pressures kicked into gear by unnecessarily harsh and ultimately unnecessary government lockdowns due to the C Word virus.
Possibly making things worse? An imminent series of Federal Reserve interest rate hikes in the short term, could prove more inflationary. If so, this could result in driving small businesses and individuals out of sectors like housing and small retail.
With no relief on these fronts in sight, and with the Russian Bear apparently willing to irrationally destroy a people, a culture and a nation they don’t like the pressure will continue. Until something breaks. Which seems likely to occur in our financial markets.
Some general words of wisdom
Glenn Reynolds of Instapundit likes to say (more or less) that bad things will keep going on… until they can’t. That’s true. The only problem? We currently have so many bad things going on, we can no longer see clearly the point at which they can’t.
So, numbers and charts aside, we have a classically negative international and domestic scenario. That scenario leads us to think we may face, or may already be in, a secular bear market.
That drives investors toward adopting different investing tactics. We’ll now need to replace what’s worked well for roughly 10 years and get a lot more defensive.
I’ll elaborate on this in future columns. But right now, here’s a maxim I’ve always observed:
In a secular bull market, always be as aggressive as your investment philosophy permits and make as much money as you can.
In a bear market, unless you’re an expert at going short, your object is to lose as little money as is humanly possible. That way, you’ll still have most of your chips to play when the next secular bull arrives.
UPDATE:
As of 1:30 p.m. ET Thursday, another stock market cliff dive has gotten at least a temporary respite. The Dow is currently up 108.95 point (0.32%), reversing, at least for now, a Thursday morning swoon. Ditto the broader-based S&P 500, currently slightly positive by 6.19 points, a feeble 0.12% gain, at least for now.
The tech-heavy NASDAQ continues to wallow in its 2022 Slough of Despond. It remains down 76.22 points today for an iffy loss of 0.56%.
No one knows where today’s action will end at the 4 p.m. closing bell. But until Mr Market tells us otherwise, he’s still feeling increasingly bearish. At least cyclically. If not yet fully in secular bear mode. We’ll have to keep an eye on Ukraine and fuel prices to answer this one.
Headline image link: Branco cartoon via Comically Incorrect.
