secular-bull-and-bear-market-definitions — market cycles and regimes

The Two Timeframes of Market Trends

Investors often hear about bull and bear markets, but not all market trends operate on the same timeframe. Understanding the distinction between secular (long-term) and cyclical (short-term) market trends is essential for setting appropriate expectations and making sound investment decisions.

A secular trend spans 10 to 25 years and reflects deep structural forces in the economy. A cyclical trend operates within the secular trend, lasting one to several years and often corresponding to the business cycle. Confusing the two can lead investors to become overly optimistic during cyclical rallies within secular bear markets or overly pessimistic during cyclical corrections within secular bull markets.

Defining Secular Markets

Secular Bull Markets

A secular bull market is an extended period, typically 15 to 20 years, during which stocks trend higher with rising valuations. During secular bull markets, cyclical corrections occur but tend to be relatively shallow, and recoveries tend to be swift. The underlying direction of valuations is upward.

Characteristics of secular bull markets:

Price-to-earnings ratios trend from below-average to above-average levels
Real (inflation-adjusted) stock returns significantly exceed historical averages
Corporate profit margins generally expand
Investor sentiment shifts from skepticism to optimism to euphoria
Buy-and-hold strategies produce strong results
Cyclical bear markets are typically shorter and less severe

Secular Bear Markets

A secular bear market is an extended period during which stocks make little progress on an inflation-adjusted basis, despite experiencing cyclical rallies. Valuations trend lower, and real returns disappoint relative to historical averages.

Characteristics of secular bear markets:

Price-to-earnings ratios trend from above-average to below-average levels
Real stock returns fall well below historical averages
Corporate profit margins may compress
Investor sentiment oscillates between hope and despair
Buy-and-hold strategies produce frustrating results
Cyclical bull markets may be powerful but fail to reach new secular highs

Cyclical Markets Within Secular Trends

Within any secular trend, shorter cyclical movements occur. These cyclical bull and bear markets typically last from several months to a few years and often correspond to business cycle expansions and contractions.

Cyclical bull market: A rally of 20% or more from a market low, typically lasting one to three years.

Cyclical bear market: A decline of 20% or more from a market high, typically lasting several months to two years.

The critical insight is that cyclical movements do not change the secular direction. During the secular bear market from 1966 to 1982, several powerful cyclical rallies occurred, yet the market ended the period roughly where it started in real terms. Conversely, during the secular bull market from 1982 to 2000, multiple cyclical corrections occurred, but the underlying trend remained powerfully upward.

Historical Examples of Secular Markets

The 1982-2000 Secular Bull Market

The secular bull market that began in August 1982 and peaked in March 2000 stands as one of the greatest in US market history. The S&P 500 rose from approximately 102 in August 1982 to approximately 1,527 in March 2000, a gain of nearly 1,400% excluding dividends.

Starting conditions (1982):

S&P 500 price-to-earnings ratio: approximately 8x trailing earnings
10-year Treasury yield: approximately 14%
Inflation: declining from double-digit levels
Investor sentiment: deeply pessimistic after years of poor returns
Demographics: Baby Boomers entering peak earning and saving years

Structural drivers of the secular bull:

Valuation expansion: P/E ratios expanded from single digits to over 30x by 2000, contributing significantly to total returns.
Falling inflation and interest rates: Inflation fell from double digits to approximately 2-3%, and the 10-year Treasury yield declined from 14% to approximately 5-6%, reducing competition for stocks and supporting higher valuations.
Improving profit margins: Corporate profit margins expanded as globalization, technology, and declining interest costs boosted earnings.
Favorable demographics: The Baby Boom generation entered their peak earning and saving years, directing significant capital into equity markets.
Technology revolution: The personal computer, internet, and telecommunications revolutions drove productivity gains and created new investment opportunities.
Deregulation and globalization: Financial deregulation and expanding global trade supported corporate profitability.

Cyclical corrections within the secular bull:

1987 crash: S&P 500 fell 34% from August to December 1987
1990 correction: S&P 500 fell 20% from July to October 1990
1998 correction: S&P 500 fell 19% from July to August 1998

Despite these cyclical setbacks, the secular trend remained intact, and investors who maintained their positions were rewarded.

The 2000-2013 Secular Bear Market

The secular bear market that began with the bursting of the technology bubble in 2000 produced deeply disappointing results for buy-and-hold investors. From March 2000 to March 2013, the S&P 500 produced a total return of approximately 25% including dividends, or roughly 1.7% per year. Adjusted for inflation, returns were near zero.

Starting conditions (2000):

S&P 500 price-to-earnings ratio: approximately 30-44x (depending on methodology)
10-year Treasury yield: approximately 6%
Investor sentiment: euphoric, with widespread belief in a "new economy"
Valuations: well above historical averages by every metric

Structural drivers of the secular bear:

Valuation compression: P/E ratios contracted from extreme highs to below-average levels, offsetting much of the earnings growth that occurred.
Two major recessions: The 2001 technology recession and the 2008-2009 financial crisis produced severe earnings declines and market drawdowns.
Financial crisis and deleveraging: The 2008-2009 financial crisis resulted in a banking system near collapse, requiring years of balance sheet repair.
Flat to declining profit margins (initially): The early 2000s saw margin compression before eventual recovery.
Demographic headwinds: Baby Boomers began transitioning from accumulators to decumulators.

Cyclical rallies within the secular bear:

2002-2007 rally: S&P 500 rose approximately 100% from October 2002 to October 2007
2009-2013 rally: S&P 500 rose approximately 130% from March 2009 to March 2013

These powerful cyclical rallies tempted investors to believe the secular bear had ended, but new highs were repeatedly followed by crushing declines. The 2007 peak was followed by a 57% decline, and it took until 2013 for the market to sustainably exceed the 2000 peak.

The Post-2013 Secular Bull Market

Many market historians date the beginning of a new secular bull market to 2013, when the S&P 500 finally broke above its 2000 and 2007 highs and entered a sustained uptrend. From 2013 through 2024, the market produced strong returns despite several cyclical corrections (2018, 2020, 2022).

Supporting conditions for the secular bull:

Valuations reset to more reasonable levels by 2013
Ultra-low interest rates reduced competition from bonds
Corporate profit margins expanded to record levels
Technology leadership continued (cloud computing, mobile, AI)
Share buybacks reduced share counts, boosting earnings per share

Whether this secular bull market continues depends on the evolution of valuations, interest rates, profit margins, and other structural factors.

Structural Drivers of Secular Trends

Several factors drive secular market trends, typically working in combination:

Valuation Starting Points

Secular bull markets tend to begin when valuations are depressed (P/E ratios below 10-12), providing room for multiple expansion. Secular bear markets tend to begin when valuations are elevated (P/E ratios above 20-25), creating a headwind as multiples compress.

The Shiller CAPE (Cyclically Adjusted Price-to-Earnings) ratio, which averages earnings over ten years to smooth cyclical fluctuations, provides useful context:

CAPE below 10: Historically associated with subsequent strong long-term returns
CAPE of 10-20: Historically associated with moderate long-term returns
CAPE above 25: Historically associated with below-average long-term returns
CAPE above 30: Historically associated with poor long-term returns

Interest Rate Regimes

Secular bull markets often coincide with declining interest rate environments, which support higher equity valuations. Secular bear markets may occur during periods of rising rates or elevated rate volatility that compress valuations.

The period from 1982 to 2020 saw generally declining interest rates, supporting equity valuations throughout much of this time. The return to rising rates in 2022 raised questions about future valuation support.

Inflation Regimes

High and volatile inflation typically accompanies secular bear markets, while low and stable inflation supports secular bull markets. The 1966-1982 secular bear occurred during the Great Inflation, while the 1982-2000 secular bull coincided with the Great Moderation of inflation.

Productivity and Profit Margins

Periods of strong productivity growth and expanding corporate profit margins tend to produce secular bull markets. When productivity growth stagnates and margins compress, secular bear conditions may emerge.

Demographics

The age structure of the population affects saving and spending patterns. When large cohorts are in their peak earning and saving years (ages 35-55), equity demand tends to be strong. When those cohorts shift to decumulation, demand may weaken.

Implications for Long-Term Asset Allocation

Understanding secular market trends has important implications for investors:

Setting Return Expectations

During secular bull markets, buy-and-hold equity investors may reasonably expect returns above historical averages (10-12% nominal, 7-8% real). During secular bear markets, returns may fall well below averages, potentially to low single digits nominal or even negative in real terms.

Investors entering markets at low valuations have historically enjoyed better outcomes than those entering at high valuations, regardless of the exact timing.

Portfolio Positioning

During secular bull markets:

Buy-and-hold strategies tend to work well
Cyclical corrections are typically buying opportunities
Equity overweights relative to bonds may be rewarded
The biggest risk is being out of the market

During secular bear markets:

Valuation discipline becomes more important
Cyclical rallies may not lead to new highs
Diversification across asset classes may provide better risk-adjusted returns
The biggest risk may be staying fully invested at poor entry points

Avoiding Common Mistakes

Mistaking cyclical moves for secular changes: Investors often become euphoric during cyclical rallies within secular bear markets, believing the trend has changed, only to be disappointed. Conversely, they may panic during cyclical corrections within secular bulls, missing subsequent recoveries.

Ignoring valuations: Secular trends ultimately reflect valuation changes. Investors who ignore starting valuations may overestimate future returns at secular peaks and underestimate them at secular troughs.

Extrapolating recent performance: Strong recent returns (during secular bulls) lead investors to expect continued strong returns, often just as conditions become less favorable. Poor recent returns (during secular bears) lead investors to capitulate, often near secular bottoms.

Identifying Secular Transitions

Secular transitions are difficult to identify in real time and are typically recognized only in hindsight. However, several factors may suggest a secular transition is occurring:

Signs of a secular bull market ending:

Valuations reaching extreme levels (CAPE above 25-30)
Investor euphoria and speculation
Declining profit margins after years of expansion
Rising interest rates after extended declines
Deteriorating breadth (fewer stocks participating in gains)

Signs of a secular bear market ending:

Valuations reaching depressed levels (CAPE below 10-15)
Extreme investor pessimism
Profit margins stabilizing after contraction
Interest rates at low levels
Strong breadth in early rallies

Investor Takeaways

Think in decades, not quarters: Secular trends operate over 10 to 25 years. Understanding the secular context helps set appropriate long-term expectations.
Respect valuations: Starting valuations have historically been the best predictor of long-term returns. High valuations suggest lower future returns; low valuations suggest higher returns.
Do not confuse cyclical moves with secular changes: Powerful rallies can occur within secular bear markets, and painful corrections can occur within secular bull markets. Neither changes the underlying secular trend.
Adjust expectations, not necessarily allocations: Most investors should maintain diversified portfolios regardless of secular conditions, but adjusting return expectations based on starting valuations is prudent.
Stay invested but remain humble: Identifying secular transitions in real time is extremely difficult. Maintaining a long-term perspective while acknowledging uncertainty serves investors well.

Understanding the difference between secular and cyclical market trends provides essential context for long-term investing. While predicting the exact timing of secular transitions remains beyond reliable forecasting, awareness of these long-term patterns helps investors maintain perspective through the inevitable ups and downs of market cycles.

Secular Bull and Bear Market Definitions