What are the forces underlying market performance?

Financial market performance is driven by a long list of complex, interrelated secular and cyclical factors. Wide-ranging forces directly and indirectly influence the decisions of businesses and consumers, pushing market prices up and down.
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Financial market performance is driven by a long list of complex, interrelated secular and cyclical factors. Wide-ranging forces directly and indirectly influence the decisions of businesses and consumers, pushing market prices up and down. Company-specific performance, of course, but also a host of macroeconomic influences including central bank activity, fiscal policy decisions and even geopolitical events at home and elsewhere in the world can have a significant impact on portfolio returns.

Making sense of all the information can be confusing. But it’s important to understand the interrelationship of these factors and the potential implications for both strategic and tactical investment decisions. Consequently, PIMCO pays a great deal of attention to all of these forces in developing its cyclical and secular forecasts for the global economy, key regions, and the major asset classes.

What is a Secular Outlook?

In the world of investing, the word secular is used to describe long-term trends, activities and viewpoints. Secular factors may remain largely consistent over time and are less likely to be affected by short-term fluctuations.

Investors looking to invest for the long-term, need to have a secular view of the market – that is, how they think it may perform over the years ahead so they can make informed, strategic decisions to guide the course of their investments for the long run.

At PIMCO, we produce our own long-term or secular outlook for the global economy and financial markets with a three- to five-year investment horizon. This lays out the broad trends and themes we believe will have important investment implications over that time frame. We believe understanding how macroeconomic fundamentals may unfold in different parts of the world is critical to identifying investment trends and potential areas of risk to watch.

Some of the macroeconomic factors we consider when forming a long-term view – and which other investors may find useful to consider – include:

View our case study to better understand time in the market over market timing. View Case Study

What is a Cyclical Outlook?

A cyclical view of the market is at the other end of the spectrum, providing insight into the short-term factors and current events influencing financial markets, asset classes or sectors. Cyclical factors move up and down more readily than secular drivers, and they tend to be shorter-lived.

Even those investing for the long run should keep an eye on short-term market forces for the information they may provide about opportunities and risks.

In addition to our annual secular forum, PIMCO investment professionals meet quarterly, three times a year to assess these shorter-term macroeconomic and market factors. We consider them in the context of our longer-term secular outlook and use them to guide our more immediate investment decisions and recommendations.

Some examples of shorter-term cyclical factors to consider when assessing market performance and potential include:

  • The current business cycle and perceptions of its strengths and vulnerabilities
  • Potential near-term implications of current political events and policy decisions – both domestic and elsewhere in the world
  • Supply and demand forces in a particular asset class or sector
  • Company results and risk factors

Using both to guide investment decisions

Having both a short-term cyclical view of the market and a long-term secular outlook helps provide an essential compass for navigating markets.

A robust secular view can offer insights into long-range investment themes and help to keep investors on the right long-term path. In the face of day-to-day market distractions, this can be a valuable tool for guiding the investment decision-making process. An up-to-date reading on key cyclical forces, on the other hand, is essential to stay aware of the more immediate, on-the-ground conditions, risks and opportunities.

When used together, investment portfolios can be positioned to benefit from structural changes and broader trends in the global economy, while still capturing opportunities presented by current events.

More information

This series has touched on some important concepts that are covered in more detail in other series, including:

Inflation See Series 2, Topic 4 – What impact does inflation have on bonds?
Monetary policy See Series 5, Topic 2 – How do monetary and fiscal policies affect markets?
Political forces See Series 5, Topic 3 – How might political events influence markets?
Fiscal policy See Series 5, Topic 2 – How do monetary and fiscal policies affect markets?
The business cycle See Series 5, Topic 4 – Why do GDP and other key indicators matter to markets?