Since the year 2000 the world’s major stock markets have been in a long downtrend known as a secular bear market. Throughout this period stocks have moved up and down in shorter-term cyclical bull and bear phases, however they are no higher today than they were 12 years ago, and there is now evidence that they are once again resuming a downtrend.
Secular bears and cyclical bulls
Global stock markets such as the FTSE 100 Index and the Dow Jones Industrial Average are in a long downtrend known as a secular bear market which began early in the year 2000. Over that 12 year period the FTSE has fallen more than 17% while the Dow has managed a rise of just 9%.
During a secular bear market there are shorter-term cyclical bull (up) and bear (down) phases, however the overall trend is flat or negative, especially when the price performance is adjusted for inflation. The chart below shows the cyclical bull and bear phases of both the FTSE and Dow since January 2000.
A 14 year chart of the FTSE 100 Index with the Dow Jones overlaid on top (red line)
Chart courtesy of Yahoo Finance. The FTSE 100 Index is no higher today than it was in February 1998.
Lessons from history
Since 1900 there have been three secular bear markets. These were from 1906 to 1920, 1929 to 1949 and from 1968 to 1982. These prior downtrends lasted anywhere from 14 to 20 years – the average being 16 years, which would imply that the current secular bear market should end around 2016. Today’s economic landscape however, most closely resembles that of the 1930’s and 1940’s, and therefore in my view the current bear market trend is likely to last until around 2020.
Buy & hold at your peril
Investing in an index tracker and holding it year after year became the strategy of choice for a great many investors during the late 80’s and 1990’s. However markets are cyclical and adopting a buy and hold strategy in a secular bear market is a bad idea and one that’s likely to lose you a great deal of money.
It’s critical that investors are cognisant of the wider macro environment in which they are investing. In order to make money in a secular bear market you either have to become adept at timing the cyclical bull and bear phases, something which is very difficult to do, or you have to be much more selective when it comes to picking the stocks you buy.
The bottom line
The mantra of buy and hold can only be applied successfully in a market that is in a secular uptrend (bull market), but that’s not what we have today. The major stock indices are in a bear market that is likely to last until around 2020. As a result those looking to employ this strategy should look at other markets such as precious metals and energy.