I recently had a conversation with a friend of mine on the long-term trends of the stock market. I am one of those people who believe that history doesn’t repeat itself, but it certainly does rhyme. In other words, I don’t think that history automatically repeats itself, but I do certainly think that human beings are creatures of habit and we often repeat similar mistakes that have happened in the past.
Now what does that have to do with personal finance? I think that you can read a lot of what happens in the stock market and investing by examining, from a historical point of view, longer trends that seem to occur. That doesn’t mean there will be automatic repetition within the market, but it does mean that I think we can understand what is going on in the economy and the stock market by looking at these longer trends.
One of the reasons I think that is important is because I often hear that this time is different. The Great Recession was different than other previous recessions or this particular stock market is fundamentally different than previous ones. When I hear about those claims I automatically have some skepticism. I mean it isn’t unusual to have a recession in the American economy and it isn’t unusual to have a shorter trend of extended losses (e.g. a correction or a bear market). I try to take the long-view when it comes to things. I hate when people say that this is the worst time ever or this is unprecedented in American history. So color me skeptical when people make such claims.
I open with this discussion as context for what I see as a current long-term trend in the American stock market. Those trends are known as secular trends which are long-term trends where one can understand what is the current status of the stock market.
I often see this blog as a means to potentially educate others, including my students who read this, about different ideas when it comes to personal finance. Let’s be honest personal finance, particularly investing in the stock market, can seem like it is a foreign language that is totally unrecognizable. So explaining some of this personal finance vocabulary, I hope, might be helpful to people.
Secular Bear Market vs. Secular Bull Market
A secular bear market is a long-term trend in the stock market, typically 15-20 years, where the stock market essentially moves sideways during this time. During this type of secular trend you will have both cyclical bull and bear markets. A cyclical bear market is where the stock market loses at least 20% of its earnings. The average cyclical bear market is about 18 months or so. A bull market is where the stock market is on an upward trend. Typically a cyclical bull market lasts about 39 months or so.
We are currently experiencing a 7 year bull market. While unusual it snot unprecedented. In the 1990s there was a 9 year bull market that was the longest in history.
A secular bull market is where the stock market seems to be constantly going up. The last clear secular bull market we had was from 1982-2000 where the stock market went up over 600% during that time. However, in that secular trend we did have cyclical bear and bull markets.
Why Is This Important?
Understanding what kind of long-term trend you are in can help you prepare for investing your money properly. Where do you put your assets? How can we explain whether it goes up or down or longer-term economic trends? I have written before on this blog about the importance of understanding these kinds of trends.
Now this doesn’t mean, however, that if we are in a secular bear market that you put your money in your mattress. In a secular bear market you typically don’t lose money, you actually could grow, but the growth just isn’t as strong. For example, many people consider 2000-2009 the lost decade because, in essence, the stock market began where it ended at the end of the decade. On January 1, 2000 the S&P 500 stood at 1425. Ten years later on January 1, 2010 it stood at 1123. During that decade if you had your money totally invested you would have lost over 20% in terms of your overall return.
Now that number is a bit misleading because the United States was just recovering from the Great Recession in 2010 and that number doesn’t include things like dividends and money you contributed to your accounts over that time, but that doesn’t mean that decade wasn’t tough for investors. In fact, it wasn’t until 2013 that you can say you started to make a profit on your investments.
However, if you would have invested your money in the previous secular bull market from 1982 to 2000 you would have averaged over 15% growth every year.
The morale of this story is that investing in the stock market is a LONG-TERM activity. If you need the money in 5 years then don’t invest in the market. Put it in a savings account or CD. There has NEVER, EVER been a history in the stock market over 20 years where people have lost money. Pick any point in which the stock market has existed and go out 20 years and you will have made money over that time. For example, if I would project out 1996-2015 my rate of return is actually 7.5%.
What Does That Mean Today?
I believe that we are currently coming to the end of a secular bear market or we are in the early stages of a secular bull market. I can’t say if it is one way or the other because we typically see these things with some hindsight. However, we have been in a long-term secular bear trend for a while. Considering they last, on average about 16 years, we should be coming to the end of it or we came to the end of it from 2009-2011. If either one is the case that means we have anywhere from 10 years or more of good stock market returns coming.
For me that means I continue to invest in the stock market. I would invest, even if there was a long-term secular bear market (as I have been for the past 10 years) because the money I am putting away is for the long-term. The more money I put away now the more I know that it will pay off for me down the road. This is one of the reasons I play mental monetary gymnastics with myself. I believe that we will have a wonderful decade of stock investing. The more money I put in now the more it will pay off down the road. However, I want my debt gone as well. I think one of the reasons I have trouble committing to pay off my debts faster and reduce my investments is because of this upward trend that I see coming. My money, in my opinion, will work more for me by investing than paying off debt.
The Bottom Line: The United States has a savings and retirement crisis. Pension plans are disappearing and more and more people are responsible for their own retirement. It is important to understand long-term trends that play out in investing. History doesn’t repeat itself when it comes to investing, but I think it does rhyme. We are currently experiencing, in my opinion, a long-term trend where we are at the tail end of a secular bear market or just beginning a secular bull. Either way I believe the next decade of stock market investing looks pretty bright in general.
Don’t take my word for it though. Do your own research. Investigate for yourself. Learn new vocabulary. This is a subject too important you not too.