Secular & Cyclical Markets

Beware of the Secular Bear

Secular Bear

At Talon Eight an educated investors is are our best customers. The more an investor knows about the stock market and alternative investments the more they will appreciate the products and services offer by Talon Eight. Our research breaks down the S&P 500 index, detailing three secular bear markets and two secular bull markets. How investors positions their portfolios is vastly different when confronted with these long-term secular markets. Our research makes the case that equity markets have been in a secular bear market since early 2000. In current conditions, investors need to re-think their portfolio strategies. Investors need to take action by 1) diversifying their portfolio with additional asset classes such as managed futures and 2) following an investment strategy that is actively managed to take advantage of trading situations. The venerable long term buy-and-hold (passive) strategy employed and respected by many investors in the 80s and 90s is ill-equipped for the volatile and sideways action of a true secular bear market.

The bottom line is ... during secular bear market periods an active management style has the ability to profit from major cyclical turning points. More importantly, the alternative investments offered by Talon Eight may also provide a degree of non correlation with other asset classes, potentially offering investors a greater degree of portfolio diversification.

The charts and tables presented below provide an historic perspective of the ebb and flow of the S&P 500 index. Our research shows that we are in fact in a secular bear market.

Secular and Cyclical Market Introduction

Secular bear markets work in the same fashion but in the opposite direction. The countertrend or cyclical markets are bullish in nature providing investors with strong periods with an upside bias. But these periods are short lived before the secular bear market reasserts its longer-term downward trend.

The charts below illustrate the performance of each of the four secular markets experienced by the S&P 500 Index since 1929. A link to a detailed description of each secular market is available in the "Quick Links" (shown above/right) or in the "Market Highlights" area beneath each chart.

Secular Markets: 1929 - 1968

Secular bull and bear markets are made up of cyclical phases. These cyclical phases can either move with or against the primary (secular) phase. In other words, the cyclical phase can be in sync with the primary market (i.e. cyclical bull phase within a secular bull market or cyclical bear phase within a secular bear market). On the other hand, the cyclical phases can also be counter trend oriented (i,e. cyclical bear within a secular bull market or cyclical bull phase within a secular bear market). These phases move the markets up or down ... sometimes they are in sync and at other times they can be counter trend oriented.

An interesting historically deference between secular bull and secular bear markets is in the duration and magnitude of loss for the average cyclical bear phases. During powerful secular bull markets, cyclical bear phases are short lived. For the most part they are a small bumps in the road. But during a "true" full blown secular bear markets the cyclical bear phases are long and drawn out. They are not a quick reversal in the primary market, they are fact the root cause of the prolonged secular bear market. During the 1929 - 1948 secular bear market the cyclical (in sync) bear phases lasted on average 2.25 years (27 months). The average cyclical (counter trend) bear phase for the 1948 - 1968 secular bull market was only .81 years (10 months) in duration. The magnitude of the average loss also favored the 1929 - 1948 secular bear market with an average loss of 52% compared with an18.1% average loss for the 1948 - 1968 secular bull market.

Chart 1: Secular Markets 1929 to 1968

The turning points used to define the secular/cyclical markets are based on the academic work of Gonzalez, Powell, and Shi in their report Defining and Dating Bull and Bear Markets: Two Centuries of Evidence.

Secular Markets: 1968 - 2000

The tendencies of the bear phases remain the same when compare the next two secular markets. During the 1968 - 1982 secular bear market the average duration for the (in sync) bear phase lasted almost 1.5 years (18 months). During the roaring 1982 - 2000 secular bull market, the average duration for the (counter trend) bear phase lasted .only 28 years (3 months).The magnitude of the average loss again favored the 1968 - 1982 secular bear market with an average loss of almost 30% compared with a 20% average loss for the 1982 - 2000 secular bull market.

Chart 2: Secular Markets 1969 to 2000

The turning points used to define the secular/cyclical markets are based on the academic work of Gonzalez, Powell, and Shi in their report Defining and Dating Bull and Bear Markets: Two Centuries of Evidence.

Where are we now?

Since 2000 the S&P 500 Index has been in a secular bear market, it has completed two cyclical phases; one bearish and one bullish. In October 2007 the S&P 500 index entered into its third cyclical phase ... which we define as a cyclical bear phase within a secular bear market. When we include this on-going (in sync) cyclical bear phase into the average, we mirror other the cyclical bear phases during secular bear markets in both duration and magnitude. The table below summarizes all of the in sync and counter trend bear phases since 1929. The present 2000 - 20xx secular bear market continues to exhibited similar bear phase tendencies to other long and drawn out secular bear markets. Secular bear markets last on average 18 years ... we have a long way to before we see the end of this secular bear.

The root cause of the most recent cyclical bear phase stems from the "Sub Prime Banking Crisis". The crisis hit full stride in mid 2008 with Fannie Mae and Freddie Mac both placed into conservatorship, Lehman Brothers declaring bankruptcy, Bank of America buys Merrill Lynch, JP Morgan Chase agrees to purchase the banking assets of Washington Mutual and insurance giant AIG receives guaranteed loans from the Federal Reserve. Where are we now ... in a long term secular bear market.

Chart 3: Secular Market 2000 - Present

Conclusion

Secular bear markets on average last about 18 years so investors need to recognize that this secular bear is here to last. Investors do have options in this bearish market. Alternative investments like those offered by Talon Eight can provide clients an active management style combined with a low correlation to traditional investment vehicles.

When compared to traditional investments, Talon Eight offers:
• exposure to the broad base of markets;
• long and short exposure;
• the potential for lower volatility to other investments; and
• improved portfolio risk-adjusted returns.

Contact Talon Eight to discuss how we might improve your investment portfolio.

Continue ... For a complete historical overview of the S&P 500 index begin with the Crash of 29'.

Click for an overview of the 1929 - 1948 secular bear market.

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