What Is Secular?
Secular is a descriptive word used to refer to market activities that occur over the long term. Secular can also point to specific stocks or stock sectors, unaffected by short-term trends. Secular trends are not seasonal or cyclical. Instead, they remain consistent over time. Secular stocks maintain a static trajectory regardless of current economic trends. When applying the term to the stock market, a secular market is the market's overarching trend or direction for five years or more. Further, secular trends may be upward or downward in direction.
- Secular refers to market activities over the long term or a stock that isn't influenced by short-term factors.
- A secular trend, stock or market is one that is likely to continue moving in the same direction for the foreseeable future.
- Secular stocks include technology firms such as Netflix and eCommerce leaders such as Amazon.
- Secular movement can be either positive or negative in its direction.
Secular trends and secular stocks are those in which investors and analysts expect to remain moving in the same direction over the long term. The clean-energy movement is a more recent secular trend, and experts project it to stay relevant for the foreseeable future. Another example is the growth in impact investing, where investors choose investments that will have beneficial social and environmental results in the local communities.
Within the stock market, experts consider technology firms such as Netflix (NFLX) and Google parent Alphabet (GOOG) secular because short-term economic trends have a minimal lasting impact on their long-term performance. As reported by CNBC, in March of 2018, David Kostin of Goldman Sachs highlighted what they say is a list of the best secular growth stocks prime for investment. The short-list includes internet companies Amazon (AMZN) and Google's Alphabet as well as Domino's Pizza (DPZ) and Summit Materials (SUM). Goldman chooses these companies because they grew sales by over 10% over the three previous years and have robust and forward-looking potential.
A stock is secular when the associated company earnings remain constant regardless of other trends occurring within the market. Companies are often secular when the primary business relates to consumer staples or products that most households consistently use. Consumer staples can include personal care items, such as shampoo and toilet paper, various food-item producers and certain pharmaceutical companies.
Secular movements can proceed in either a positive or negative direction. Therefore, the term does not always mean growth. Investors may, therefore, be secular bears or secular bulls. Also, secular can refer to subtle or dramatic movements as the term does not identify the degree of change. The defining characteristics are the long-term nature of the movement and the lack of impact of short-term trends on associated activity.
Secular stocks are very different from cyclical stocks, which are securities whose price is impacted by the movement in the overall economy due to consumer buying power. General Motors (GM) and other automobile stocks are considered cyclical. Home Depot (HD) and other retailers are also cyclical, as they often get a boost when the economy is doing well, and consumer spending is up.
It is important for investors to identify secular trends in markets, not just short-term trends, to develop a long-term investment strategy. Examples of secular trends include an aging population, which tends to have different spending and savings habits than a younger population, the expansion of a particular technology like the internet and heavy reliance on certain commodities such as oil. Also, while experts consider them long term, secular trends are not permanent.
In his book, Stocks for the Long Run (McGraw-Hill Education, 5th edition, 2014), Jeremy Siegel, an economics Ph.D., and finance professor at the Wharton School, University of Pennsylvania, argues that equity securities overall–particular U.S. equities–are secular. He argues that they will likely outperform the other major asset classes secularly or over the long term.
In support of his argument, Siegel points to the 130 years between 1871 and 2001. During any rolling 30-year period within this timeframe, stocks outperformed all other asset classes, in particular bonds and T-bills. Most experts agree that a 30-year period constitutes a secular trend.