What Is Secular?
Secular is a descriptive word in finance used to characterize long-term market activity.
Additionally, secularism may identify certain firms or stock sectors unaffected by cyclical patterns. Seasonal or cyclical tendencies do not exist in secular trends. Instead, they remain steady throughout time.
Understanding Secular
Regardless of the state of the economy, investors and analysts anticipate that secular trends and secular stocks will continue to move in the same direction over the long run. Secular markets, as they relate to the stock market, have a long-term, prevailing trend or direction. Secular trends may also point in either an upward or negative direction.
Investors must recognize secular and short-term market patterns to create a long-term investing plan. The aging population, which often has different saving and spending patterns than younger generations, the spread of a specific technology, like the internet, the clean energy movement, and the rise of impact investment are a few examples of secular trends.
Illustrations of Secular
Analysts view technology companies like Netflix and Google, parent Alphabet, as secular in the stock market because short-term economic changes have little impact on their long-term success.
According to a March 2018 CNBC article, Goldman Sachs’ David Kostin developed a list of the top secular growth businesses with excellent investment opportunities.
The online giants Amazon and Alphabet, a division of Google, together with Summit Materials and Domino’s Pizza, are on the shortlist. Goldman selected these businesses because of their solid and promising prospects and sales growth of more than 10% over the three prior years.
Additional corporations often mentioned as examples include Apple and Amazon, whose operations do not substantially depend on seasonal fluctuations. Other secular equities include Deere, Tesla, and Devon Energy.
Since there will always be a market for solar equities, they may be regarded as secular even during difficult economic times.
How to Spot Secular Patterns
When the profits of the related firm stay the same despite other market developments, a stock is considered secular. Businesses that deal primarily in consumer staples or goods regularly used by most households are often secular.
Personal care products like shampoo, toilet paper, food manufacturers, and pharmaceutical corporations might be considered consumer staples.
If a stock’s sales are expected to be stable despite other market developments, it is considered a secular play. Consumer staples are probably good secular bets since people will still need them throughout recessions.
Cyclical vs Secular
Secular stocks are distinct from cyclical stocks, whose value fluctuates in response to shifts in consumer purchasing power throughout the economy. These businesses stand to lose the most from a downturn in the economy.
Discretionary spending tends to fall during recessions. Therefore, cyclical equities are often those whose earnings rely on them. For instance, Starbucks and Nike are often cited as cyclical stocks because customers tend to reduce their expenditure on these items during hard times since they are considered somewhat pricey and non-essential.
Particular Points to Remember
There are two possible directions in which secular movements might go: positively or negatively. Consequently, the phrase does not necessarily imply growth. Secular bulls or bears may make up an investor’s portfolio.
Furthermore, because “secular” does not specify the extent of change, it may also apply to modest or significant shifts. Its distinguishing features are the movement’s long-term orientation and the absence of short-term trends’ influence on related activities.
Secular trends are only sometimes long-term, even when academics believe they are.
Jeremy Siegel, a Ph.D. economist and finance professor at the Wharton School, University of Pennsylvania, makes the case in his book Stocks for the Long Run (McGraw-Hill Education, 5th edition, 2014) that equity securities, primarily U.S. equities, are secular and will probably outperform the other major asset classes secularly or over the long term.
To bolster his claim, Siegel highlights the 130 years that passed between 1871 and 2001. Stocks beat all other asset classes over any rolling 30-year period during this era, particularly bonds and T-bills. The majority of specialists agree that a secular trend lasts for thirty years.
Secular Trends in Healthcare: What Are They?
Secular healthcare trends relate to disease activity trends over time, often many years. Seasonal or periodic patterns do not alter secular trends; population immunity, for example, may have an impact.
Secular Headwinds: What Does It Mean?
A headwind in the financial world is a factor that works to restrict or hinder development. The phrase “secular headwind” describes long-term elements restraining market expansion throughout the economic cycle’s upswing.
Secular Tailwinds: What Does It Mean?
A tailwind in finance is a factor that contributes to the acceleration of market growth. Long-term economic patterns that support market expansion instead of cyclical ones that impede it are called secular tailwinds.
The Final Word
Secular business trends in investment have little to do with the economic cycle. A secular stock will likely maintain its value during a downturn in the economy or a recession. A cyclical stock or trend, on the other hand, is more likely to track changes in the overall economy.
Conclusion
- Transient factors don’t impact secular market activities because they take place over long periods of time.
- A market or trend expected to keep going in the same primary direction for the foreseeable future is known as secular.
- Cyclical patterns—influenced by market fluctuations such as booms and busts—are juxtaposed with secular tendencies.
- Technology companies like Netflix and e-commerce giants like Amazon are examples of secular stocks.
- A long-term trend’s secular movement may be flat, positive, or negative.
