The definition of a secular trend
A secular trend is a long-term rising or falling trend in an economy’s price level or real output. When analysts speak of a secular bear market, they are referring to a prolonged period (usually years) of falling stock prices. In contrast, a secular bull market is a prolonged period of rising stock prices.
The four most common causes of secular trends are population growth, technological innovation, demand changes, and supply changes. However, identifying the cause of a particular secular trend can be difficult since all these factors are usually present to some degree and interact with each other.
The difference between secular trend and business cycle
The business cycle is the natural rise and fall of economic growth that occurs over time. The cycle is a continuous motion that consists of four distinct phases: expansion, peak, contraction, and trough.
The secular trend is the long-term direction of the economy. It is the average level of economic activity over a period of years, and it tends to move in a gradual and uninterrupted direction. The trend can be influenced by major events such as wars or recessions, but it will eventually resume its original path.
The movement in the secular trend
One of the most important aspects of technical analysis is the identification of the secular trend. The secular trend is the long-term direction of the market, and it can last for years or even decades. The secular trend is the primary driver of the long-term direction of the market, and it is the foundation upon which all other technical analysis is built.
long-term growth trend
A secular trend is a long-term historical movement in economic indicators such as GDP growth, population growth, or inflation. These trends can last for decades or longer and can be difficult to predict. A secular trend is different from a business cycle, which is a shorter-term phenomenon driven by fluctuations in aggregate demand.
There are several ways to measure a secular trend. One common method is to take the moving average of an indicator over a long period of time, such as 10 years. This smooths out the shorter-term fluctuations and makes it easier to see the long-term direction of the trend. Another method is to fit a statistical model to historical data and extrapolate This can be difficult to do accurately, but it can give more insight into the drivers of the trend and how it might change in the future.
There are several possible explanations for secular trends. One is that they reflect underlying changes in demographics or technology that shift the long-run growth potential of an economy. Another is that they are driven by changes in government policies or institutions that affect economic activity. Finally, they could simply be random fluctuations that gradually become magnified over time. It can be difficult to disentangle these different explanations, but all of them could play a role in driving secular trends.
Policymakers need to be aware of secular trends because they can have a major impact on the economy. For example, if population growth is slowing, this could lead to lower future demand for housing and other services. If inflationary pressures are on the rise, this could lead the central bank to raise interest rates and slow economic activity. Understanding these trends is essential for making sound policy decisions and achieving sustainable economic growth.
medium-term adjustment
In the long run, all economic variables tend toward a certain level, which economists call the “equilibrium.” The equilibrium is the price or quantity that would prevail if supply and demand were in balance. The long-run equilibrium is determined by factors that do not change within the time horizon of our analysis, such as technology, population growth, tastes and preferences, and natural resources. These “long-run” factors allow us to identify a trend in prices and quantities even if we do not know what will happen in the future.
The long-run trend is sometimes called the “secular” trend because it refers to a longer time frame than the business cycle, which consists of alternating periods of expansion and contraction lasting a few years each. Although we cannot predict exactly when secular changes will occur or how large they will be, we can often identify them after they have occurred. Many observers believe that a number of secular changes are currently underway that will have profound implications for the U.S. economy in the 21st century.
A movement away from the long-run equilibrium is called an “adjustment.” There are two types of adjustments: short-term and medium-term. A short-term adjustment is one that corrects itself within a year or two; a medium-term adjustment takes longer—several years—to play out. Most short-term adjustments are small; for example, a temporary shortage of workers might cause wages to rise for a few months until more workers become available. By contrast, most medium-term adjustments are relatively large; for example, a significant increase in productivity (the amount of output per hour of work) can result in sustained economic growth for many years.
In this lesson, we’ll focus on medium-term adjustments because they are more important than short-term ones and because they are less well understood.
short-term fluctuations
Short-term fluctuations are not the movement in the secular trend because they don’t last long enough to be considered part of the long-term trend. These fluctuations are caused by things like changes in the business cycle or seasonal effects, and they tend to even out over time.