Understanding Secular Stock Market Cycles


The concept of secular cycles is sometimes dismissed or misunderstood by investors because they are confronted with a lot of incorrect or contradictory information about these cycles. First impressions can be a powerful force. Adding to the confusion, there are at least three schools of thought about the causes or drivers of secular bulls and secular bears. The principles and theories within those schools are quite different.

The most common school identifies secular cycles based upon chart patterns or average length of past cycles. The second school identifies secular cycles based upon the force of reversion. The members of this school believe that the market’s valuation level is naturally drawn back to its mean over time. The third school believes that secular stock market cycles are driven by fundamental principles of finance and economics.

This article seeks to help you to differentiate the various sources of secular stock market information and understand the basis of their positions. It will explore in detail the principles from the third school and conclude with a quantitative outlook for the stock market environment and expected future returns. This will show that secular cycles are mathematically-driven and not phenomena or coincidences. It will also highlight the need to focus on decade-long periods and not century-long average returns.

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