Secular Trend: Definition, How To Identify It, And Example

A secular trend refers to a long-term and enduring pattern or movement in a particular market, industry, or aspect of the economy that remains relatively consistent over an extended period. Secular trends are typically not influenced by short-term or cyclical factors and are characterized by their sustained direction, whether it’s upward, downward, or neutral. These trends often span years or even decades and can have a profound impact on various sectors, from technology and healthcare to environmental sustainability. Recognizing and understanding secular trends is crucial for investors and businesses looking to develop long-term strategies and make informed decisions.

Secular trends and secular stocks are expected to maintain their direction over the long term, regardless of current economic conditions. These trends can either be upward or downward. Identifying secular trends is essential for investors looking to develop a robust long-term investment strategy.

Secular trends can encompass various aspects, from demographic shifts, such as an aging population, to technological advancements like the internet, clean energy initiatives, and the growth of impact investing.

For instance, companies like Netflix and Google’s Alphabet are considered secular stocks because their long-term performance is minimally impacted by short-term economic trends.

Goldman Sachs identified a list of prime secular growth stocks, including Amazon, Google’s Alphabet, Domino’s Pizza, and Summit Materials. These companies consistently achieved over 10% sales growth over the preceding three years and exhibit strong future potential.

Other examples of secular stocks include Apple, Amazon, Deere, Tesla, and Devon Energy. Solar stocks may also fall into this category as they tend to maintain consistent demand even during economic downturns.

Secular stocks are associated with companies whose earnings remain stable despite other market trends. These companies often operate in sectors related to consumer staples or consistently used products.

Consumer staples can encompass a range of products, including personal care items, various food producers, and specific pharmaceutical companies. Their demand remains constant, even during economic recessions, making them strong secular plays.

Secular stocks differ significantly from cyclical stocks, which are influenced by the broader economy’s movements due to fluctuations in consumer buying power. Cyclical stocks tend to suffer during economic downturns because they depend on discretionary spending, which typically decreases when finances are tight.

While secular movements can be either positive or negative, the key feature is their long-term nature and resistance to short-term trends. Secular trends are not necessarily permanent, but they are typically long-lasting.

In his book, “Stocks for the Long Run,” Jeremy Siegel argues that equities, particularly U.S. equities, are secular investments that tend to outperform other asset classes over the long term. Historical data supports the idea that stocks have consistently outperformed other assets in 30-year rolling periods.

Secular trends aren’t limited to a single sector; they can be observed across various industries. Let’s explore a few examples of secular trends in different sectors:

In the technology sector, we witness rapid advancements that often translate into long-lasting secular trends. For instance, the proliferation of smartphones and the internet has reshaped our world. Companies like Apple and Google have thrived in this environment, as the demand for their products and services remains consistently high. These technology giants are prime examples of secular stocks.

In healthcare, the aging population is a significant secular trend. As the baby boomer generation continues to age, the demand for healthcare services and products such as pharmaceuticals and medical devices remains on an upward trajectory. Secular trends in healthcare are influenced by demographics and are less affected by short-term economic fluctuations.

The clean energy and sustainability sector is experiencing a robust secular trend. As the world becomes increasingly conscious of environmental issues, there is a growing demand for renewable energy sources and sustainable practices. This trend is likely to persist as more countries and companies commit to reducing their carbon footprint.

One key distinction between secular trends and short-term market volatility is the time horizon. Secular trends unfold over extended periods, often spanning years or even decades. Short-term market volatility, on the other hand, encompasses rapid price fluctuations within weeks or months.

Investors should be aware that short-term market events, such as economic crises or geopolitical tensions, may create noise and fluctuations in the market. However, these events are less likely to significantly alter the trajectory of secular trends, making them a valuable anchor for long-term investment strategies.

Recognizing and capitalizing on secular trends can provide investors with stability and growth potential in their portfolios. By understanding the enduring nature of these trends, investors can make informed decisions that align with their long-term financial goals.

In investing, “secular” signifies market trends with a low correlation to the business cycle. Secular stocks are investments that tend to preserve value, even during economic downturns. In contrast, cyclical stocks or trends are more closely tied to economic fluctuations.

Secular trends are characterized by long-term consistency and are less influenced by short-term factors, while cyclical trends are more dependent on the broader economic cycle, experiencing fluctuations with economic conditions.

Secular trends are long-lasting but not necessarily permanent. They can evolve or change over time in response to various factors.

Recognizing secular trends is crucial for investors because they provide stability and growth potential for long-term investment strategies, helping diversify portfolios.

Yes, external market shifts or economic events can influence the direction of secular trends, but these trends tend to remain relatively stable.

The primary advantage of investing in secular stocks is their resilience; they tend to preserve value even during economic downturns.