As most people are aware, about every 5 years US stock market goes through one cyclic bear market, and we just exited one of the worst cyclic bear markets in history.
US stock market also has a longer secular cycles of average around 17 years, shown in the chart below, and we are still in the secular bear market. The cyclic bear market in a secular bear market tends to be much severe than the cyclic bear market in secular bull market.
The chart above starts with the Great Depression/World War II secular bear from 1929 to 1942, due to the burst of the largest asset bubbles from heavy leverage of banks and investors.
One of the strongest secular bull market started at 1942, two years before the end of WWII, at a time of great pessimisms and extremely high tax rate. Dow Jones index went up 10 times during the 22-year period, which again created asset bubbles from greedy investors.
After that, with Vietnam War, assassination of JFK, Watergate, oil embargo, etc., Dow Jones Index stayed sideway in the 17-year secular bear market period from 1965 to 1982.
The next secular bull market started in 1982 when tax, inflation, interest rate were at extremely high level. Dow Jones index went up 10 times during the 18-year period, created various asset bubbles globally again, and that was also the time the terms “buy-and-hold”, “buy-the-dip”, and “dollar-cost averaging” became popular again, and they were proved again to be fatal in the subsequent secular bear market.
If stock market history repeats itself again like the past 100 years, we probably will experience another 5-year cyclic bull and bear market before we enter into the next 17-year secular bull market, and we should expect tax rate to be much higher over the next several years, just like the previous transition from secular bear market to secular bull market.
Like other auction markets (real estates, commodities, bonds, tulips, antique collectibles, etc.), stock market tends to play against human emotion of greed and fear by inflating and deflating asset bubbles, so the secular market cycles probably will repeat itself as well. The proven investment strategy in a secular bear market can be learned from the greatest stock investors (Sir John Templeton and Warren Buffett) of previous secular bear markets: buy-low-sell-high value stocks. Sir John Templeton made his first fortune from buying depressed stocks during the 1939 secular bear market cycle, and Warren Buffett has been very successful in both previous and current secular bear markets.
When the current secular bear market ends, money will be shifted towards buying and holding speculative growth stocks. Peter Lynch, made his fortune from the 1980 to 1990 secular bull market, describes the growth strategy in his books. In a secular bull market, expensive stocks will get even more expensive due to speculative expectation, hence this growth strategy is usually called “buy-high-sell-higher”.