Secular Cycles

Investor expectations for stock market returns are typically based on long-run averages. Most investors envision a series of returns – with a few good years followed by a bad one – that average approximately 5-10%. On average, that perception is valid; since 1928, the Dow Jones Industrial Average has averaged a compounded 7.1% return. The subsequent expectation is that after a multi-year holding period, the good years would exceed the bad and net a positive return. While this second expectation may be valid on average, a long-term view also indicates several extended periods of surge and stall which have historically had a significant impact on multi-year holding periods. These extended periods, known as “secular cycles,” last 15 to 25 years and include market returns that tend to follow the prevailing trend of that period.  

A secular bull market is an extended period with generally positive returns and infrequent loss years; a secular bear market is an extended period with flat or negative returns and a higher probability of losses in a given year.

Prolonged flat or negative markets are a concern for most investors. In the 20th century, there were three prolonged flat-market periods, when the stock markets were flat for 15 to 25 years.

A portfolio of U.S. stocks bought and held by a typical investor during those periods would not have increased in value. While the stock market was roughly the same at the beginning and end of those secular bear markets, the markets fluctuated significantly during the cycle. In hindsight, an effective active management approach might have attained reasonable returns during those extended flat periods.

See Dow Jones historical trends chart.

As of 2011, we are 11 years into a flat market, and the Dow and S&P 500 are below their levels of 11 years ago. While there may be short-term cyclical bull markets where the stock market makes meaningful progress, those results must be viewed as advances inside a secular bear market. In addition, a successful investment strategy in the secular bull market from 1982 to 1999 would look very different from a successful strategy during the secular bear market from 1966 to 1981.

Our active management approach is designed to help our clients achieve their goals in various market environments.


Past performance is not indicative of future results. This information is for illustrative purposes only and is not indicative of any investment or strategy result. Indices are unmanaged, and one cannot invest directly in any index. The S&P 500 is an index of 500 stocks representing major U.S. industry sectors. The Dow Jones Industrial Average is an index of 30 large U.S. company stocks.

The investment recommendations and/or assumptions made herein are not meant to be a prediction of future performance or events. Losses can occur from any investment, including those recommended by Retirement Income Solutions, and it is likely any assumption used herein will not occur as estimated. Factors such as size and performance of investment positions and accounts, length of time positions are held, the amount and timing of purchases and sales, client objectives and restrictions, tax issues, interest rates, cyclical securities price trends, news pertaining to investments and markets, changes in client plans and other factors all influence performance and assumptions materially. No investment strategy or investment plan, including a well-diversified portfolio rebalanced periodically, can guarantee a return or that losses will not occur.

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