September 2, 2001
Tom Petruno:
Market Beat
Investors Weigh the Cyclical vs. the
Secular
Every generation of investors tends to
think of its experiences in the stock market
as unique, but that is true only with respect
to the names of the companies and
individuals involved.
In the bigger picture, the story is always
the same: recurring cycles of boom and
bust, excessive optimism and excessive
pessimism, money made and money lost.
The market is all about cycles, though it
becomes more difficult to accept that at
the extremes--when things either are very
good for stocks, or very bad. At the
extremes, many otherwise intelligent
people come to believe that the good
times, or bad times, will never end.
That was the overwhelming sentiment in the first quarter of 2000,
when the technology stock mania reached its peak.
It also may be the view of a growing number of investors today,
as they confront the possibility that the U.S. market will fall for
two years straight--something that hasn't happened since 1973-74.
The blue-chip Standard & Poor's 500 index, which slid 10.1% in
2000, is down 14.1% so far this year.
The market's last back-to-back down years saw the S&P plunge
17.4% in 1973 and 29.7% in 1974, amid the first oil crisis, a
sharp recession, the Watergate scandal and the unwinding of the
blue-chip stock mania of the early 1970s.
"Where's the bottom?" is the universal question today, one that
became a bit more desperate last week as major market indexes
careened toward their two-year lows reached in April. The S&P
500 lost 4.3% for the week to end at 1,133.58, a stone's throw
from the April 4 low of 1,103.25.
Unfortunately, simply accepting cyclicality as inevitable in
markets provides no key for the door to investment riches. If
cycles were the same each time in duration and magnitude,
everyone would know what to do, and when.
To keep it interesting, the market makes sure to vary the lengths
of cycles and the percentage gain or loss in the average
stock--though investors' overall emotional experiences are largely
the same each go-round (ultimately, either euphoria or despair).
Because cycles are tough enough to call correctly (except in
retrospect), long-term investors have usually been well-advised to
avoid the urge to time the stock market's cyclical swings, and
instead focus on getting the secular trend right.
Wall Street's idea of a secular trend pretty much follows the
dictionary definition: "continuing for a long time, or from age to
age."
The stock market had many ups and downs in the 1950s and
1960s, but long-term performance charts of the S&P 500 and the
Dow Jones industrials make it clear that a secular bull market was
going on from 1949 to 1966, fueled by the nation's post-World
War II prosperity.
After 1966, the market overall struggled until the early 1980s. A
popular chart among Wall Street bears shows how the Dow index
rose to just below the 1,000 mark in 1966, then spent 16 years
trying to decisively break through that mark (briefly topping it in
1973, 1976 and 1981) before finally soaring through it in 1982.
There were plenty of boom and bust cycles for particular stock
market sectors in that 1966-to-1982 period, but by the late 1970s
many investors either despised stocks or just didn't care about
them. As inflation surged, real estate, gold, money market
accounts and other non-stock alternatives became far more
interesting to many people.
Was it a secular bear market between 1966 and 1982? Depending
on the stocks you owned, it might have been. At a minimum it
was a long period in which being out of the market may have
been far more profitable than being in it, especially adjusted for
inflation.
That changed in 1982, when stocks began to rocket with the
economy's rebound from the deep recession that began in 1981.
Despite the crash of 1987 and the bear market of 1990 that
followed Iraq's invasion of Kuwait, many Wall Street pros argue
that stocks have been in a secular bull market since 1982. And
indeed, at least until 2000, it had been smarter to be in the market
than out of it for the previous 18 years.
From its low in 1982 to its 2000 record high, the Dow index
soared 14-fold, from 777 to 11,723. The Nasdaq composite index
soared 31-fold. You couldn't get that kind of return at the bank in
that period.
For investors who are trying to keep a long-term focus today, the
key issue is (or should be) whether the secular stock bull market
that began in 1982 has ended or is merely facing a cyclical
interruption.
If you believed that the broad market's secular trend (say, for the
next 10 years or so) would be down, or at best flat, you probably
would structure your investment portfolio much differently than if
you assumed the '00 decade would repeat the '90s experience.
Older investors, in particular, probably would favor bonds and
other income-generating options over stocks, though younger
people might keep loading up on equities, figuring that the 20- or
30-year payoff still should be decent.
But pinpointing the end of a secular bull market is just as tough
as, or tougher than, correctly calling shorter-term market cycles.
Nobody rings a bell to say, "It's over." All any investor can do is
weigh the fundamental evidence and make an educated guess
about the best portfolio composition to produce a desired return
within acceptable parameters of risk.
A good starting point in assessing the stock market's potential is to
ask what factors helped spur the previous secular trend, and
whether those factors are still in force.
The secular bull market that began in 1982 was powered by a
host of factors, but at the top of the list are these: an expanding
global economy; falling inflation and falling interest rates; rising
worker productivity amid a major shift toward investment in
technology; increased industry consolidation; the end of
communism in Russia and the former Eastern Bloc; and favorable
demographics (i.e., an aging population with larger sums to
invest).
Underpinning stocks in that secular rise, of course, was a boom in
corporate profits that was derived from many of the factors listed
above.
Have those factors disappeared, or are they waning? The
long-term-bearish case against stocks today is based on that
premise. Pessimists say that interest rates aren't likely to fall much
further, that inflation is likely to turn up this decade, that global
capitalism is reaching its limits (and is facing a backlash in many
quarters), and that worker productivity can't increase in the next
decade as it did in the last.
Add it up, and corporate profit growth overall is destined to be
slower in this decade, the bears argue. Stocks, they say, still are
too highly valued for the profit growth that's on the horizon.
The bullish case rejects all or most of those suppositions, and
points to demographics as the ace in the hole: The U.S.
population is getting older, and people will have to save
more--and stocks still are the best savings vehicle in the very long
run, the bulls note.
But as the aging Japanese population has demonstrated during
that nation's secular bear market (which began in 1990), people
who become bored with stocks, or afraid of them, can find other
things to do with their savings.
latimes.com
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