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Anatomy Of A Secular Bull Market

I have some pretty strong ideas about the current market environment. In fact, I think we are in the early stages of a secular bull market and can expect to see the markets continue to rise over the next 15-20 years. Seriously. This does not mean they are going straight up, far from it. But what I mean is that over the long term, with periodic corrections, consolidations and pullback, the markets are only going to go higher. I have demographic and technical analysis to back up my views but more of that in just a bit.

First, what is a secular bull market? This is a long and protracted period of economic growth that results in higher values for property, equities and other investments. This is because there are more buyers in the market than sellers. The reverse is true for a secular bear market.

  • Secular Trend – A secular trend is one that last for a long period of time, usually 5-25 years. The secular trend is the primary market trend and the strongest in terms of trend analysis.

Demographics Of The Secular Trend

It all comes down to demographics, people, to understand the secular trend. This story starts with the Baby Boomers, the largest segment of U.S. population. This generation was taught by their parents to save money, they understood the value of a dollar because it was made of silver and the environment for business was great in the post-war economy. Over time the Boomers built up portfolios of stocks, commodities and real estate as they were taught and advised by their money managers. The economy boomed during this time and America grew.

The next generation, my generation, was much smaller. For some reason the Baby Boom of the 50’s and 60’s was followed by a baby bust in the 70’s and early 80’s. As a generation we grew up with conflicting values. On the one hand we were told to save and invest by our parents, told to buy and consume by the t.v. and media and to “dam the man” by popular culture. Needless to say it was a fun time but not a time in which we, as a generation, were preparing for the future.

2010populationbyageYou may by now see where I am heading. The preceding generation was large, were savers and held a lot of what are termed “more risky” assets such as stocks and real estate. The following generation  was smaller and characterized by non-saving consumerism. When the Baby Boomers reached retirement age beginning in the early part of 2000’s they began to sell off their investments in preparation for retirement. The bad thing for them is that there are more of them than there are of us (70-80’s kids, Generation X-r’s) making a market environment where there are more sellers than buyers, a secular bear market. This is why the markets ultimately trended sideways from the 2000 until 2013. There are other things to keep in mind but demographics have the most to do with it. For example the Tech Bubble of the nineties and the market crash of 2008.

The Bull Is Back

I think it is easy to see how demographics affects the secular trend.  So, what does this mean now?  Well, after Gen X comes Gen Y and then the Millenials.  These two groups are larger than Gen X and make up a significantly large portion of the population. I understand that they are having a hard time with jobs at this time but we are making progress. Economic trends are up and so long as this is true the youngest and largest part of our population will continue to strengthen and invest in their and our futures. Remember, as the Millenials come on line in terms of jobs, business, investment and etc they are becoming the net force in the markets.

 The Technical Secular Picture

Looking at a chart of the Dow Jones Industrials or S&P 500 there is a technical argument for the secular bull market as well. The tech driven bull market that ended in the 1999-2000 Tech Bubble was the official end of the previous secular bull market and the beginning of the secular bear market which reigned from that time period until 2013. It is easy to see how the highs set in 2000 are the top of the range and held the U.S. markets in a sideways trend for roughly 14 years.

spx_secular_trend_analysis

During those 14 years there are some key time periods that coincide with the demographic analysis. First, in 2000 the Baby Boomers had begun to turn 60. Not all planned to retire at that time but enough did, and enough were planning to retire soon, to shift the tides in the favor of sellers and begin the secular bear market. Then, when the market was hitting bottom in 2003 the Gen X’er’s were turning 30 and taking charge of their lives. That, and a hot housing market, helped the markets to recover until 2008. At that time Boomers who had been forced to put off retirement stepped back in as sellers, popping the housing bubble and starting the global financial crisis.

The market hit bottom again in 2009 and has made a nice recovery since then. The current recovery, as was the previous, was orchestrated through QE, bail outs and financial manipulation but it has taken hold. Economic policies were a band-aid patch on the markets until the population could mature enough to bear up the burden of the Baby Boomers and still function strongly. The Gen X-er’s couldn’t do it alone, it took their younger brothers and sisters, and even their own kids in some cases, to lend a hand.

With that in mind there are some targets we can apply to the S&P 500. For one, the height of the secular bear is 750. It is reasonable to assume, using standard technical analysis, that the new secular bull would move up past the top of the range by at least that much before a major correction could be expected. This likely won’t happen in a straight line, will come with plenty of bumps and could take a year(s).