Guerite’s investment strategies are predicated on the concept that markets experience long-term swings from undervalue to overvalue and back again. The theories behind this phenomenon have been speculated at length and have spawned an entire academic field called behavioral economics. Historically, these market swings, called secular markets, have occurred, on average, over a 13 to 18 year period.
(Over the course of the 20th century) "we had three huge, secular bull markets that covered about 44 years, during which the Dow gained more than 11,000 points. And we had three periods of stagnation, covering some 56 years. During those 56 years the country made major economic progress and yet the Dow actually lost 292 points."
- Warren Buffett, FORTUNE Magazine, Dec 6, 2001, "Warren Buffett on the Stock Market"
Secular bull markets are characterized by long-term increasing stock market values, punctuated with temporary declines, followed by progressively higher valuations. Eventually valuations reach a point of unsustainable overvaluation. And a new secular bear market begins.
Secular bear markets are characterized by long-term periods of overall “sideways” movement in stock market values. This "sideways" movement is characterized by declines, followed by market rebounds to previous market highs, but not materially higher. As earnings continue to increase, but stock market values do not, valuations eventually reach a point of undue pessimism and begin a new secular bull market.
Secular Markets
S&P 500 Index – Logarithmic Scale
(1950 – 2005)
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