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Secular and cyclical cycles are common, but what do they really mean?
The terms secular and cyclical are tossed around by business news pundits on a daily basis. A search on either topic does give some explanations, but how can you apply these definitions to your trading strategy in order to make smart trades?
A secular market
First of all, you need to understand what a secular market means. In the financial markets, a secular cycle means a long-term boom or bust. This time frame has been debated as being anywhere between five and 20 years, but I am going to define it as lasting at least 10 years.
A couple of examples that economists agree as being secular bull or bear cycles include the time period between 1906 through 2000. During the 1906–21 period, the annual real return was -1.9%. In the following eight years, from 1921 to 1929, there was a +24.8% annual return. The return in the 20-year period following that was +1.2%, and the following 17-year period brought in +14.1%. The last couple of secular cycles took place from 1966 through 1982, with the bear market returning -1.5% and from 1982 through 2000, which brought in a +14.8% return.
In a secular bull market, strong investor sentiment is among the key forces driving prices higher. In a secular bear market, weak investor sentiment causes a drop in prices. Other factors affecting both secular cycles include national and worldwide events such as war, population changes, cultural changes, and political policies or government changes.
Cyclical and noncyclical stocks are terms that get tossed around and even mixed up with secular and nonsecular. To clarify these terms, I will go over them individually and summarize them overall.