“Bank on the trends, and don’t worry about the tremors. Keep your mind on long-term cycles and ignore the sporadic ups and downs …” — J. Paul Getty (as said to him by a successful financier)^[1]J. Paul Getty, How To Be Rich

Secular markets or secular cycles in an asset class are driven by strong national and international trends that remain for many years. Cyclical markets, on the other hand, are driven by seasonal and business cycles^[2]Many theories try to explain and predict the economic or business cycles (Kondratiev Wave, Kuznets Swing, Juglar Cycle, and Kitchin Cycle) and stock market cycles (Balentriran Cycle, Benner Cycle, … Continue reading and last for shorter durations. The secular markets are influenced by long-lasting demographic changes, productivity growth, technological innovations, and geo-political dynamics and span many cyclical markets in opposing directions.

Several secular bull and bear markets occurred over the past century, but there is no hard-&-fast rule to define them. The Chart Store divides the long-term market cycles of the last century into three bears and two bulls. JP Morgan counts three secular bear markets ( 1929-1949, 1966-1982, and 2000-2016) and three secular bull markets ( 1949-1966, 1982-2000, and 2016-2033?) since 1927. Barry Ritholz also counts three secular bulls and three secular bears of similar durations.

According to Fidelity (via Barry Ritholz):

• Average secular bull market lasted 21.2 years and produced a total return of 17.2% in nominal terms and 15.9% in real terms. The market’s P/E more or less doubled, from 10.1 at the start to 20.5 at the end.
• Average secular bear market lasted 14.5 years and had a nominal total return of +1.0% and a real return of –2.3%. The market’s P/E compressed by an average of 9 points, from 20.5 at the start to 11.3 at the end. 

Flat and Up Moves Last a Longer Time

This blog post looks at secular markets of the past 121 years, though we date them differently than others and use a different terminology – up move, flat move, and down move.

Fig. 1 is the logarithmic chart of the monthly close of the S&P 500 from 1900 to 2022. It covers many bear markets, bull markets, and periods when the equities moved within a large range. It shows that the down moves in S&P 500 are of smaller duration than flat and up moves.

For this analysis, we consider the following based upon the visual inspection of Fig. 1.

• • Up Move (Secular Bull Market): The dominant multi-month trend for equities is up in up moves. It may encompass many bull and bear markets, but their extreme – high and low – levels do not overlap. In an up move, a bear market ends above the previous bull market’s starting point, and a bull market starts above the beginning of the last bull market. The endpoint of an up move is above its start by several factors.
  • Flat Move (Secular Bear Market): Flat move has no dominant multi-month trend. In this phase, the equities fluctuate between two extreme levels for many years. It also contains many cyclical bull and bear markets, and their low and high levels usually overlap. The low of a bear market may fall below the start of the previous bull market, and the high of a bull market may be below the beginning of the last bear market.
  • Bull Market (Cyclical): Bull markets advance by more than 20% from the low, lasting several years.
  • Bear Market (Cyclical): Bear markets decline by more than 20% from the high over many months.
  • Down Move: Down moves are the bear markets that are deeper (more than -40% decline from the peak) and last longer than the average bear market.

Equities Can Move Within a Large Range For Many Years

Over the past 121 years, there were three extended periods when the equities fluctuated between a large range (depicted by black arrows in Fig. 1). These periods look like a trading range or a flat move on the charts.

The first flat move was in the early decades of the nineteenth century. The second was in the 1960s and 1970s, and the third was in the 1990s and 2000s. Even though these flat moves included a few bear and bull markets, the index did not break above the high or below the low of the range. The average duration of these three flat moves is 19.7 months, and their high levels were higher than their low level by an average of 100%.

The first flat move in equities lasted for 25 years. From January 1900 to December 1924, the S&P 500 fluctuated between a high of 10.30 and a low of 5.8. The high of this range was 78%^[3]Monthly close was used until 1970 for calculating declines and gains. After January 1970, monthly high and low were used above the low. There were approximately five overlapping bull and bear markets during this period. It also included the panic of 1907 and World War I.

The second flat move lasted almost 18 years, from January 1962 to December 1979. The S&P moved between 55.63 and 118.05. This phase contained the last stages of the bull market of the 1960s, the bear market of the early 1970s, and the first stage of the bull market of the 1970s. The bear and bull markets in this phase also overlapped. This time period included the stagflation of the 1970s and the oil crisis.

The third flat move lasted more than 16 years, from January 1997 to February 2012. During this period, the S&P 500 made a couple of peaks above the 1500 levels and a couple of troughs at 800 and 650 levels. The peaks were more than 111% above the troughs. This phase included the Dot-Com Bubble and burst and the Global Financial Crisis. It covered the last leg of the 1990s bull market, the first bull market of the 2000s, and the first two bears markets of the 21st century.

Equities Rise by Many Factors in Up Moves

The up moves also last for many years. There have been three such periods since 1900 (see the green arrows in Fig. 1). The first such move started during the Depression and lasted until the 60s, the second was in the last quarter of the century, and the third is currently ongoing and started following the Great Recession.

The average duration of two completed up moves is 31.2 years, and the total gain is 2239% at a 10.6% annual rate. The gains do not include dividend reinvestments.

The first up move in the equities in the 20th century lasted 36.9 years, from June 1932 to May 1969. During this time, the S&P 500 rose by more than 2133%, from a low of 7.84 to 106.50 at an annualized rate of 8.8%.

Despite including a Depression-era bear market, the dominant trend of the equities during this phase was up. No bear market during this period breached the low of a previous bear market, and no bull market ended below the high of the last bull market.

The first up move could also be dated from April 1942, eliminating the 1937-1942 bear market. This dating would reduce the duration of the up move to 27.1 years and the total gain to 1258%, or a 10.1% annualized rate.

The second up move started at the lows of September 1974 and ended in March 2000, lasting 25.5 years. During this period, the S&P 500 gained 2344% at a 13.3% annualized rate. This phase also included many bull and bear markets, but they did not overlap.

The third up-move is ongoing. It started in March 2009, following the aftermath of the Global Financial Crisis. From its nadir of 666.79, the S&P 500 gained 623% to the all-time high of 4818.62 at a 16.6% annualized rate. It has lasted 12.8 years.

Cyclical Bear Markets Cause Big Damage But Do Not Last Long

Since 1900, the S&P 500 declined by more than -40% from its peak eight times, which are grouped under five down moves (see the red arrows in Fig. 1). The average duration of these bear markets or down moves is 2.7 years, and the average decline is -58.9%.

Three greater than -40% declines occurred during the first down move from September 1929 to June 1932. In October 1930, the index fell to 17.92 from the September 1929 high of 31.30. A year later, it again dropped by more than -40% from the October 1930 high. In May 1932, it was again below -40% from the October 1932 high. The index lost -84.8% over 2.8 years from September 1929 to May 1932.

The second down move lasted longer, from February 1937 to April 1942, and declined by -56.7%. During this phase, the index declined by more than -40% twice,  in March 1938 and in April 1942. This down move overlapped with World War II. The extremes of this bear market were also within the extreme levels of the 1929-32 bear market.

The third down move was from December 1972 to September 1974, when the S&P 500 lost -46.7% over 1.8 years. The fourth occurred after the Dot-Com bubble, and the index declined by -48.5% over 2.1 years. The final down move lasted for 1.4 years, from October 2007 to March 2009, in which the S&P 500 declined by -57.7%.

Roarin’ 20s and Depression

The bull market of the Roaring 20s, even though it lasted for eight years, does not qualify as an up move because the 325% gain of the 1920s bull market disappeared in the bear market of 1929-1932.

In the bull and bear markets of the 1920s, the S&P 500 lost a little bit from 1921 to 1932. The low in August 2021 was 6.45, and the low in June 1932 was 4.77, a decline of -26.0% over 10.8 years. These two do not constitute a flat move as their extremes stand out as outliers.

Current Secular Bull Market Has More Room To Run

The last two up moves lasted an average of 31.2 years (or 26.3 years, if we date the first up move from 1942). The average gain for S&P 500 was 2239% at a 10.1% annualized rate (or 1801% at an 11.8% annualized rate). The current up move has lasted 12.8 years with a 623% gain.

If the past is of any consequence, then there is a strong chance that the current multi-month trend in equities may last much longer and rise much higher. Using unscientific extrapolation, we estimate the S&P 500 to reach above 12500 by 2035 at an annualized rate of 9.1%. The alternate growth rate and price level estimates are 7.7% and 15500, respectively, by 2040.

These estimates are highly subjective, and the sample size is small; nevertheless, the probability of the current secular bull market or the up move lasting another 10-15 years is very strong, despite the current cyclical bear market. The S&P 500 gained 16.6% annually from the March 2009 low to January 2022 high, a rate it may not be able to sustain, though its annualized rate may be in the high single digit.