Secular Trends
Secular Trends
There's an age-old quote that in the short term, the market is a voting machine. But in the long run, it's a weighing machine. Or put another way, every security will eventually make its way to its true value over time. But it will often exhibit volatility on its way there, fooling and wrong-footing many along the way.
Secular trends (or regimes) are usually created through the interaction of long-term variables like demographics, debt, technology, globalization, and the longer-term government policies of the given country or region. These are variables that don’t change much from year to year.
For example, given the existing population, mortality, and birth rates, as well as immigration, we can reasonably robustly predict regional and world populations over the coming decades.
Population
Population by Age
Why is that important?
Different age cohorts tend to have very different economic behaviors.
Young cohorts are just entering the workforce, don’t have a family or kids yet, and don’t have enough money to spend or invest.
Middle cohorts are in their prime earning years, building a family, spending the most, buying a house, and investing in stocks for retirement.
Older cohorts are entering or preparing to enter retirement, spending habits are reduced, and the investment mix starts to shift toward less-risky assets like government bonds, and assets are sold for consumption.
The working-age population tends to define our employee population; as our working-age population declines, so does our labor pool. By understanding the trends in demographics, one can make long-term assessments of the future of our employee population and, in turn, our economic output per capita.
Secular Trends in Interest Rates
Trends are often segments of very long cycles. The rise of inflation from the 1960s to the early 1980s lasted long enough to be regarded as a trend by investors. Likewise, the decline in inflation since the early 1980s has been a key trend affecting the relative performance of various asset classes. For example, it drove the long bull market in bonds.
From a long-term perspective, these two trends: rising inflation (1965 -1982) and falling inflation (1982 – 2020), can be regarded as a very long cycle that resorted price stability after it was disrupted in the 1960s. If the Fed remains committed to price stability around a 2 percent rate, inflation would essentially be cyclical around the 2% level. This thesis has come under fire recently because of the pandemic and fiscal and monetary stimulus pushing inflation to unhealthy levels. The Federal Reserve is now under immense pressure to lower inflation to the target rate.
Is this the start of another trend to 1960s-level inflation? Or will the Federal Reserve commit to the 2% target range and slow inflation and the economy to reach its goals?
If the Federal Reserve sticks to there plan to control inflation, the trend in inflation should come under control, albeit with a few recessions to slow down the pace of growth causing the inflation. If inflation becomes entrenched and inflation expectations rise, a case needs to be made for the 1960s to 1980s era to repeat.