What Is Secular?
In finance, secular is a descriptive word used to refer to market activities that occur over the long term.
- Secular refers to market activities that unfold over long time horizons, or that aren't influenced by short-term factors.
- A secular trend or market is one that is likely to continue moving in the same general direction for the foreseeable future.
- Secular stocks include technology firms such as Netflix and eCommerce leaders such as Amazon.
- The secular movement of a long-term trend can be neutral (flat), positive, or negative in its direction.
Investors and analysts expect secular trends and secular stocks to remain moving in the same direction over the long term, maintaining a static trajectory regardless of current economic conditions. When applying the term to the stock market, a secular market is the market's overarching trend or direction for a long period of time. Further, secular trends may be upward or downward in direction.
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 such as the internet, the clean-energy movement, and the growth in impact investing.
Within the stock market, experts consider technology companies such as Netflix and Google parent Alphabet secular because short-term economic trends have a minimal lasting impact on their long-term performance. David Kostin of Goldman Sachs, as reported by CNBC in March of 2018, came up with a list of the best secular growth stocks prime for investment. The short-list includes internet companies Amazon and Google's Alphabet as well as Domino's Pizza and Summit Materials. Goldman chose 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 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.
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.
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–particularly U.S. equities–are secular and 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, especially bonds and T-bills. Most experts agree that a 30-year period constitutes a secular trend.
While experts consider them to be long term, secular trends are not necessarily permanent.