Did you know market cycles can have a great impact on your investment performance and affect how we approach the markets? This may seem like hocus pocus, but the reality is that the markets do move in a rhythmic series of cycles. You can see this in a basic uptrend.
Stock prices move up and down in a wave pattern within an upwardly moving channel. Each up move reaches a higher high than the previous up move. Each move lower fails to fall as low as the previous move lower. Of course, the same can be true, but reversed on the downside. Not only do cycles affect an individual stock’s price movement, but entire markets move in cycles.
There are generally two types of cycles, "bull" and "bear" cycles. These bull and bear cycles also come in two types, "secular" and "cyclical."
Secular cycles are long 7-12 year bull and 15-25 bear market periods that tend to correspond with periods of economic prosperity or retracement, respectively. The secular bull periods are times of great market and economic growth. These periods tend to be driven by such things as innovation, lower taxes, business centric government policy and global economic growth.
The secular bear periods are times of economic retracement or consolidation where excess are reined in, taxes are raised, big government policy prevails and global growth is constrained by inflation, war or anti-competitive practices.
Can you guess what period we are in right now? If you guessed a secular bear period, go ahead and give yourself a gold star.
Not all is glum of course. Within each secular phase, there are a number of cyclical bull and bear market phases. These periods are shorter, generally running 1-5 years in length, thus there can be a number of such phases in a typical secular period.
The following You Tube video does a great job of explaining where we are right now with regard to the cycles. Check it out.
Here is a link where you can download a chart showing historical secular bull and bear cycles http://www.crestmontresearch.com/pdfs/Stock%20Secular%20Explained.pdf.
Most advisors have never seen this chart, it might be interesting to share with your investment advisor and gauge his or her reaction. Remember this is your future we are talking about, so don’t be shy in evaluating your help.
This is a really good chart! I follow Crestmont Research, and their Quarterly P/E release! Great insights!
Thanks Kris.