Long-term bull and bear markets feature multiple waves that move like tides advancing and receding; often, these cyclical movements outshone any secular trend itself.
Stock prices typically trend in an upward direction, making higher highs and higher lows over time. They can also form sideways patterns or consolidate over longer timeframes.
Secular Markets
Secular markets are long-term trends that tend to either move upward or downward over an extended period yet do not change direction with every short-term market shift; instead, these long-term movements remain constant until disrupted by an event of significant consequence. Because of this stability, secular stocks offer investors a great way to invest in stocks with potential long-term upside. Investors need to understand how secular markets work before making a purchase decision in them.
A secular market can be defined as any market that is driven not by short-term events such as interest rate changes and earnings cycles but by long-term fundamentals like valuation expansion/contraction or demographic shifts. A few corrections may arise during such periods, but they typically don’t have much of an effect on overall returns.
An example of a secular market would be the airline industry. Following the 9/11 attacks, airline stocks declined due to fears that people would travel less out of fear; these investors failed to understand that demand would eventually recover after this one-time event had subsided.
Pharmaceutical and oil company shares are also subject to predictable cyclical cycles, with their share prices increasing during periods of economic expansion while decreasing during times of stagnation or recession.
Investors who take advantage of secular markets by investing in stocks from these sectors can reap a steady income source during long-term trending periods. Although their returns may not reach those seen recently, over time, these stocks will accumulate value and provide consistent wealth creation for their investors. Investors must know how to identify secular markets and find safe investment options to secure a sound financial foundation for themselves.
Cyclical Markets
Cyclical markets tend to follow the four stages of an economic or business cycle such as expansion, peak, contraction, and recession. Companies involved with cyclical industries produce more during periods of economic growth, which increases profits and sales; they experience decreased income during declines or recessions as consumers have less disposable income available for spending. Cyclical stocks often specialize in specific industries like restaurants/hospitality services/travel airlines/car manufacturers/consumer goods like luxury clothing/jewelry manufacturers, as well as utilities/real estate services.
Companies providing products and services considered “wants” rather than essentials tend to experience more dramatic cyclical swings than companies supplying essential goods and services. Since such items tend to be discretionary and catered towards individuals with higher disposable incomes, during economic booms, people with this income may spend freely on such non-essentials; during recessions or slowdowns, consumers may hold back from purchasing these non-essentials, leading to decreased profits and sales as well as falling stock prices for such companies.
People tend to stay home more during economic downturns and dine at restaurants less, thus decreasing demand and impacting restaurant stocks negatively. Consumers may also purchase fewer cars during recessions; as a result, their companies and stores could potentially see their value decline due to lower consumer purchases.
Some investors seek to capitalize on this shift in the economy by timing the market by purchasing cyclical stocks at lower points of the business cycle and selling them during its peaks. Although such strategies can yield returns, they should only be utilized with caution and in combination with non-cyclical stocks as part of a balanced portfolio that helps buffer against the adverse effects of an unstable cycle market. One analogy might be to compare them with a baseball game where only outfielders receive balls during clear weather, and the pitcher cannot hit pitches when rain or snow is present – similarly with investments similar to this!
Minor Trends
As each incoming or flood tide moves closer to shore, its ebb pulls back a bit from its high water mark set by each wave, likened to a bull or primary trend and its correction or secondary downtrend, respectively. Meanwhile, waves, ripples, and cat’s paws agitate the surface of the water like short-term fluctuations in the market. In general, an intermediate trend consists of three or more distinct minor trends, usually connected by some intermediate trend.
Dow believed that markets abided by the same laws of action and reaction as found elsewhere in nature. He proposed three significant categories – primary, secondary, and minor trends, similar to tides, waves, and ripples of water. A primary trend represents long-term dominant directions such as months or years, while secondary trends represent short-term changes within or corrections against that primary direction lasting days to weeks.
