Understanding secular trendsSecular trends are driven by fundamental changes in the economy such as evolving consumer behavior, demographic changes, or development of new technology. As a new area of growth picks up steam, investment (from individuals, companies, and even government entities) tends to flow into the industries benefiting from the secular trend, which adds further momentum.
A secular trend is not a cyclical business trend (like manufacturing activity, for example). However, economic recessions may cause a temporary pause in the advance of stocks that participate in a secular trend's development. The stocks often recover losses quickly and continue growing far sooner than stocks in other sectors of the economy.
For instance, cloud computing was an emerging secular trend of the 2010s and is expected to rapidly expand throughout the 2020s. The COVID-19 pandemic caused a brief crash in many cloud stocks, but cloud computing adoption and development actually accelerated, even during the pandemic-fueled recession that ensued.
In contrast, secular decline is when an industry's support slowly dwindles away. This can play out over many decades. The U.S. tobacco industry is a prime example of an industry in secular decline since cigarette smoking in the U.S. has become much less popular over the past few decades.
Secular market explained
The best companies for investors are helped by secular growth trends. Even with the cyclical nature of many businesses, companies in secularly growing industries are well-positioned to thrive over the long term. Secular trends occur over many years or even decades, while economic cycles are generally shorter.
Companies that benefit from secular growth trends are best able to retain value regardless of the current state of the economy. Secular growth trends enable the stocks of those companies to quickly continue gaining value following periods of market uncertainty (known as a secular bull market). As the saying goes, ultra-long-term winning stocks continue to make higher highs as well as higher lows during market downturns.
Industries in secular decline will often feature stocks focused on returning cash to shareholders as revenue growth tapers off and then starts to slowly decrease. Eventually, these stocks may start to slowly decline in value over time -- a secular bear market.
Secular growth stock examplesThe growth of computer technology is an example of a secular trend that has lasted for a couple of decades already and is expected to continue for the foreseeable future. E-commerce is another newer trend that looks like it could continue for many years.Here are two examples of companies that are benefiting from secular growth:
Following the multi-decade secular growth of computing technology, mobile devices in the 2000s emerged as a product of the latest technology advances. Apple (AAPL -0.4%) has significantly benefited from this secular growth trend, starting with sales of the iPod music player in 2003. Apple dominates the technology industry as one of the world's most valuable companies and now has a suite of mobile devices, including the iPhone, iPad, and Apple Watch.
Although sales of mobile devices have slowed in recent years, Apple is still benefiting from the secular growth trend by steadily increasing the number of its devices in service around the globe. With more than 1.65 billion Apple products in use at the beginning of 2021, the company is leveraging this massive installed user base to foster adoption of software-based services within its ecosystem. Apple is using the secular trend of rising digital mobility to expand its music streaming service, video game offerings, and digital payments processing, among other services.
The rise of Amazon (AMZN -0.51%) has occurred in tandem with the rise of e-commerce, and the company itself has accelerated the growth of the e-commerce secular trend. Amazon began as a dot-com company in the 1990s and today connects millions of shoppers to almost every product imaginable.
As Amazon benefited from the secular growth trend of e-commerce, it also developed expertise in data centers, which are enabled by cloud computing and required for the company's online shopping experience. Cloud computing is an extension of the computer technology secular growth trend, and, with Amazon leveraging its cloud computing expertise to form Amazon Web Services (AWS), the company is benefiting from two secular trends at the same time. AWS, not retail sales, is responsible for the vast majority of Amazon's profitability -- a development that is likely to continue for the foreseeable future.
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Using secular growth trends to your advantage
All secular growth trends eventually end, and, along the way, they can slow down or accelerate depending on the state of the economy. For example, the COVID-19 pandemic accelerated the secular growth of e-commerce and cloud computing. Investors who want to buy and hold quality companies should pay attention to secular growth trends and make their stock purchases accordingly.