After some extensive research into secular bull and bear trends, Edward Hornstein tells us what to expect at this juncture, based on market history. He also shares his views on some growth names poised for growth if the current uptrend can remain intact.
Kate Stalter: I'm speaking today with Edward Hornstein of Edward Hornstein Capital Management. Ed, I know you've been doing some research into market cycles, so tell me a little bit about what you’ve found, and what that might mean for the markets, looking ahead.
Edward Hornstein: Sure, Kate. What I've done over the past few months is I've decided to take a look back in history.
The database I have goes back to 1900. What I've been doing is going back throughout the past 110 years or so of market history, with the belief that cycles repeat themselves.
Even though you've got machines and high frequency trading and things might move a little faster these days, there are still the human elements of fear and greed, and history generally rhymes and repeats itself.
So, I've gone back through 110 years of history, and what I've done is I've isolated four secular bull and bear markets. And what I mean by secular bull and bear are these are longer-term phases.
For example, from let's say 2000 to now, 2011, the market has basically been flat. The Nasdaq is obviously is way off its high, but if you go look at the Dow and S&P ten years ago, it's pretty much exactly where it was. And that might continue for a few more years. That's known as a secular bear market.
Then you also get the secular bull markets. A good example of that would be 1982 to 2000. If you look at a chart of any major index for those 18 years, you have a giant bull market.
Sure, you have the 1987 crash and you have some mini-bear markets there, but pretty much the trend over those 16 to 18 years was up, and the trend now for the market is basically sideways. And that's the difference between a secular bull and bear.
In a secular bear market like we're in, it basically allows the market to work off the excesses and the froth and the expensive evaluations from the prior secular bull.
So, what I've done is, I've gone through history and I've isolated the four secular bull and bear markets since 1900 that the market has witnessed. And I want to examine them with the idea that we are probably in the eleventh year of a secular bear market now that began in 2000.
I've gone through all the secular bear markets and I've looked at them, and I've looked inside those cycles—the mini bull and bear markets you get within those secular bears.
For example, if we talk about the secular bear now, from 2000 that's still going on, we're in a longer-term secular bear, but inside that you had mini bull and bear markets. We had the 2000 crash, otherwise known as the dot-com crash, which was a bear market lasting from 2000 to 2002, and we had a mini bull market from 2003 to 2007. We had another mini bear market from 2007 to 2009, and another smaller bull market from 2009 to most recently this spring.
So, inside the longer-term secular bear market, you get what I call mini bulls and bears, what some people call cyclical bears and cyclical bulls.
Then I wanted to go into those mini bulls and bears and further isolate and examine what they look like, with the idea being: Let me take a look at how these mini bulls and bears look in these secular bear markets, and kind of try to figure out what the most likely scenario is for the market here going forward.
The research has been very, very interesting. One interesting point I found is that generally in a longer-term secular bear market, the absolute low of that bear market is generally reached in the middle of the bear market.
For example, this secular bear that started in 2000 and is still going on, we saw so far the absolute low in 2008 when the market crashed. In the 1966 to 1982 secular bear, the absolute low was made in 1974, similarly eight years into that secular bear market.
So, if history is any guide, there's a decent chance that we've probably seen the absolute lows for the market back in 2008. But what my research tells me is that for the next few years, there's probably going to be a lot more of what we've seen, these up and down markets, these mini bulls and bears, and kind of a trendless market until we finally come out of the secular bear market.
Kate Stalter: Which certainly is consistent with a lot of the geopolitical and economic developments that have been occurring recently, and are forecast to occur for the foreseeable future.
Edward Hornstein: Absolutely. And it just goes hand in hand with a de-leveraging process that's still going on. You’ve got the macro themes that you've discussed.
Eventually, these things will be put behind us, and we'll have a brand new secular bull market, but the key thing for investors to remember is that during these periods, there are plenty of money-making opportunities.
For example, the market has been flat for ten or 11 years, but we had a great bull market from 2009 until recently, that may or may not be dead yet, and from 2003 to 2007 we had a big bull market.
What I wanted to see on my research was what do the bull markets in the secular bears look like, and how to they differ from the bull markets when you get an 18-year secular bull.