Navigating Secular Market Trends

Navigating Secular Market Trends: Is the Bull Market at Risk?

The recent market pullback due to uncertainty surrounding the economy and tariffs has people wondering if this will be “the correction” that ends our bull market. To answer that question, it helps to zoom out and understand how long-term cycles affect short-term pullbacks.

Financial markets move in long-term cycles known as secular bull and bear markets. These trends span decades, and understanding where we are in the cycle is crucial for long-term investors. The current geopolitical climate has caused widespread speculation that we may be entering a secular bear market. At Stratos Private Wealth, we prefer to avoid speculation and instead take a systematic, data-driven approach to asset management. We acknowledge the heightened risks of the current market environment and are closely monitoring some key indicators to assess whether the current secular bull market is approaching its end.

What are Secular Bull and Bear Markets?

A secular bull market is a prolonged period, often lasting a decade or more, in which stock prices trend higher. These markets are characterized by strong economic growth, rising corporate earnings, and investor optimism.

Conversely, a secular bear market is a multi-year period of stagnation or decline in stock prices. These periods are marked by economic challenges, lower corporate earnings, and negative investor sentiment.

The chart below shows historical equity market performance during secular bull and bear markets. Historically, equities have delivered double-digit annualized returns during secular bull markets while returns have been negative or flat during secular bear markets.

Where are we now?

Since the 2009 market bottom, we have been in a secular bull market, with equity markets achieving significant gains. However, history tells us that secular bull markets eventually end, and we are watching several indicators for signs that this transition could be underway.

Indicators We're Monitoring

1. Absolute and Relative Equity Performance

• Several price-based indicators could signal the onset of a secular bear market, including slowing or negative returns amongst US equities, outperformance by defensive sectors, and strong emerging market returns. Despite recent volatility, these indicators do not currently suggest a secular bear market. Additionally, we monitor the number of new record highs for the S&P 500. As record highs tend to be scarce during secular bear markets, a lack of record highs can be a bearish indicator. As can be seen in the chart below, with 57 record highs last year and three already this year, the indicator does not suggest a secular bear market.

2. Market Valuations

• When markets reach extreme valuations relative to historical norms, they become more vulnerable to corrections. Today’s equity valuations are at historically high levels, consistent with past secular bull market peaks. A market with elevated price-to-earnings (P/E) ratios and high price-to-sales multiples can indicate that stocks are expensive relative to their historical averages. We are monitoring for valuation reversals and declining strength amongst the largest companies, both of which could indicate that valuations are excessive and investors are losing confidence in the market’s ability to keep up with lofty expectations. As of today, our valuation indicators are not indicative of a bear market.
  
  

3. Sentiment

• Sentiment indicators also contribute to our market outlook, including consumer sentiment and household exposure to equities. Secular bear markets are driven by risk aversion and a lack of consumer confidence. While some measures of global consumer sentiment have declined recently, investor exposure to equities remains high, causing the weight of the evidence to lean bullish. If investor positioning becomes more defensive, it could indicate declining confidence and an incoming bear market. As can be seen in the chart below, household allocation to stocks tends to reverse around the start of a bear market. As of today, equity allocations are at record highs. If allocations fall from these levels, it would suggest declining confidence in the market and portend a bear market.
  

4. Economic Output

• The equity market is supported by a strong economy, so our outlook is informed by several measures of economic output. Declining real GDP growth, increased government spending and a worsening deficit, and low US output relative to historic potential are all currently at levels that have historically coincided with a bear market. As can be seen in the chart below, GDP has trended higher during secular bull markets and lower during secular bear markets. While year-over-year real GDP growth remains relatively high at 2.8%, the decline in growth rate offers a potential warning. A further decline in GDP would further suggest the onset of a bear market.
  
  

In reviewing our overall secular market framework and all the component indicators, the weight of the evidence does not currently indicate that a transition to a bear market is underway. While we acknowledge a heightened risk environment and some deterioration of economic indicators, our valuation, sentiment, and price performance indicators are overwhelmingly supportive of a continued bull market. We would need to see more unanimous evidence of a bear market from other indicators before declaring a bear market is underway.

So What Does This Mean for our Clients?

At Stratos Private Wealth, we remain committed to managing our clients' portfolios through disciplined investment strategies and proactive risk management. While evidence suggests the current secular bull market remains intact, we are closely monitoring some key indicators to determine if conditions necessitate more defensive positioning. If we see a deterioration across indicators, we will adjust our tactical strategies accordingly. This could include reducing exposure to equities or reevaluating our fixed income positioning, as supported by our data-driven, weight of the evidence approach.

We are grateful for our clients’ confidence and will remain vigilant, adapting to changing conditions and positioning our strategies for long-term financial success. We will provide ongoing updates as we assess new data and refine our outlook.

Disclaimer: The information contained in this market commentary reflects the opinions of Stratos Investment Management. These opinions do not reflect the views of others and are subject to change without notice. Content in this material is intended for general information purposes only and should not be construed as specific investment advice or recommendations for any individual. Please contact your advisor with any questions or for specific recommendations regarding your own circumstances. Investing involves risks including possible loss of principal. Stratos Private Wealth is a division through which Stratos Wealth Partners, Ltd. markets wealth management services. Investment advisory services offered through Stratos Wealth Partners, Ltd., a registered investment adviser.  Stratos Wealth Partners and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only; and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.  To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.  Investing involves risk including possible loss of principal. Some of the information contained herein has been obtained from third party sources which are reasonably believed to be reliable, but we cannot guarantee its accuracy or completeness. The information should not be regarded as a complete analysis of the subjects discussed