What Is Secular?
In finance, secular is a descriptive word used to refer to market activities that occur over thelong term.
Secular can also point tospecific stocks or stock sectors unaffected by short-term trends. Secular trends are notseasonal or cyclical. Instead, they remainconsistent over time.
Key Takeaways
- 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 trends are contrasted with cyclical trends, which are affected by the boom and bust swings of the market.
- 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.
Understanding Secular
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 tohave different spending and savings habits than a younger population, the expansion of a particular technology such asthe internet,the clean-energy movement, and the growth in impact investing.
Examples of Secular
Within the stock market, experts considertechnology companies such as Netflix and Googleparent Alphabet secular becauseshort-term economic trends have a minimallasting 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.
Other frequently-cited examples include companies like Apple and Amazon, whose businesses do not rely heavily on cyclical factors. Deere, Tesla, and Devon Energy are also considered secular stocks. Solar stocks may also be considered secular, in that demand will remain consistent in times of economic hardship.
How to Identify Secular Trends
A stock issecular when the associated company earnings remain constant regardless of other trends occurring within the market. Companies are oftensecularwhen the primary business relates to consumerstaples or products that most householdsconsistently use.
Consumer staples can include personal care items, such as shampoo and toilet paper,various food-item producers, and certain pharmaceutical companies.
A stock is considered a secular play if its revenues are likely to remain consistent regardless of other trends in the market. For example, consumer staples are likely to be strong secular plays, because they will remain in demand even in times of recession.
Secular vs. Cyclical
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. These are companies whose business model is most likely to suffer during an economic downturn.
Cyclical stocks tend to be those whose profits depend on discretionary spending, which tends to decline during recessions. For example, Starbucks and Nike are commonly considered examples of cyclical stocks: because they are considered relatively expensive and non-essential, many consumers will reduce spending on these products when money gets tight.
Special Considerations
Secular movements can proceed in either a positive or negative direction. Therefore, the term does not always mean growth. Investors may be secular bears or secular bulls.
Also, secular can refer to subtle or dramatic movements as the term does not identifythe degree ofchange. The defining characteristics arethe long-term nature of the movement and the lack of impact of short-term trends on associated activity.
While experts consider themto be longterm, secular trends are not necessarily permanent.
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 secularlyor 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.
What Are Secular Trends in Healthcare?
In healthcare, a secular trend refers to patterns in disease activity over a long time, usually many years. Secular trends may be affected by factors such as population immunity, but they are not affected by periodic factors or seasonal trends.
What Does Secular Headwinds Mean?
In finance, a headwind refers to forces that act to slow or limit growth. A "secular headwind" refers to long-term factors that act as a dampener to market growth during the upswing of the business cycle.
What Does Secular Tailwinds Mean?
In finance, a tailwind refers to forces that help accelerate market growth. A secular tailwind refers to long-term economic trends that help feed market growth, in contrast to cyclical factors that limit growth.
The Bottom Line
In investing, secular refers to business trends with a low correlation to the business cycle. A secular stock is one that is likely to preserve value, even during a recession or economic downturn. In contrast, a cyclical stock or trend is one that is likely to follow with the fluctuations in the wider economy.
