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First and foremost I think most would agree that the US market from 2009 - 2020 was a secular bull market. The question therefore becomes:

Has (that) secular bull market ended, or, is the current situation a cyclical downturn in a (still) to be continued secular bull market. The alternative is that this is the start of a secular bear market.

Examples of secular bear markets are 1929-1934, 1969-1982, 2000-2003.

Cyclical downturns: 2012, 2016, 2019 (as recent examples) which had quick resolutions. 1987 was the classic cyclical downturn example (I never traded this one though).

Then we have the 2008-2009 example, which lasted approximately 1 year. I would call this a secular bear market, but of relatively short duration.

If this is a cyclical downturn, stocks will remain somewhat overpriced by almost any measure that you choose to employ, but they will start to trade higher again, irrespective.

How to distinguish in real time?

Now these are simply my observations, so take it as that:

(a) Secular bear markets start slowly, sucking longs in gradually who look for the bounce etc; and

(b) Continue this way for months (years); and

(c) Save their greatest declines (damage) for the end of the bear. This is the classic throwing in the towel. The most recent example of this was the 2008-2009 bear.

The reason for the slow start is that secular bears require a catalyst to ignite the fuse. That catalyst often does not arrive at the very start of the bear, it arrives a little way in.

Secular bears also (I think) require the wrong policy response from Central banks, Government, etc, which then magnifies and extends the bear.

It also helps if you can identify the cause of the bear: 2008-2009 was a credit issue. 1969-1982 was an inflation issue. 2000-2003 was a technology mania (like the railroads before them) that lacked earnings substance.

Cyclical downturns by contrast:

(a) Start fast; and

(b) Accelerate; and

(c) Bottom quickly, trapping the perma-bears.

The current issues are:

(a) Deflation;

(b) COVID-19

Has the current washout been sufficient to clear the decks? The (correct) answer to that question will identify whether this is simply a cyclical downturn, in which case we probably have bottomed, or the start of a secular bear.

COVID-19 was probably the catalyst. Unusually it arrived at the front end and was recognised fast. It will pass. What remains will be the deflationary environment. Normally a washout of this magnitude would sufficiently clear the decks of excess supply as a number of firms in each industry went under, Because through bailouts, excess supply is maintained, this process is not being allowed to happen. The classic example in the oil industry looks set to happen with a bailout of the shale producers, far better for the industry in the longer term to let them fail.

Will this policy response convert a cyclical downturn into a secular bear?

If you think yes, then hold fire as we will go lower, possibly significantly lower and the duration will extend in time. Eventually in a secular bear, fundamental valuations will provide definite information that value has returned to the markets and buy points will be quite easily identifiable.

I have my own thoughts on this which I will lay out in another post as this one is already getting long.

jog on

duc