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Auditor Andrew Bellak from Amherst, Massachusetts, asked:
Why will stock market indices always go up?
The major US stock indices – the Dow Jones Industrials, the S&P 500 and the Nasdaq – have all trended higher since their inception.
Despite the Black Monday crash of 1987, despite the Great Recession, despite COVID, they recovered. Experts say that in the long run, you can expect stocks to rise based on their earnings growth, which has traditionally been the primary mission of every company and on which investors expect the stock market to rise. management remains focused.
A look at the historical performances of the main stock market indices
One of the main drivers of stock returns is the pace of innovation, explained Avanidhar Subrahmanyam, professor of finance at the Anderson School of Management at the University of California, Los Angeles.
“Every now and then we will see unusual innovation that is essentially unforeseen and will only dramatically increase returns,” Subrahmanyam said.
Meir Statman, professor of finance at the University of Santa Clara, pointed out that some of the most important companies in these indexes started out as small businesses – like Netflix, which once only sent DVDs by mail, and Amazon. , which once only sold books. Since then, they have become technological powers.
“It doesn’t mean that all businesses are going to be successful. It’s the contrary. Many businesses are drying up or going bankrupt. But sort of, on average, what pulls this locomotive off the train are new businesses, ”Statman explained.
Even if you see some businesses declining, Statman said, others are likely to take their place and thrive. For example, alternative energy companies could replace oil companies. He also noted that some of the gains in the stock market are due to inflation. However, there is a real increase in value even when you adjust for it.
People keep investing in stocks because they typically get higher returns, in the form of capital gains and dividends, than other financial vehicles, Subrahmanyam said. These other investments, however, are less risky.
“Actions should surpass [certificates of deposit] and bonds, government bonds, because otherwise nobody would want to invest in stocks, ”he added.
Japan’s Nikkei Index: A Contrast
As major U.S. stock indices rose, Japan’s Nikkei 225 index fell sharply in the 1990s and did not surpass its 1989 high.
Ryan Detrick, chief market strategist at LPL Financial, pointed to the existence of insolvent “zombie banks” as one of the reasons for Japan’s inability to recover.
“They kept these businesses alive that shouldn’t have been left alive. And that kind of held them back, ”he said. Zombie banks survived on “regulatory forbearance,” in which the government acted as if their bad loans were of value, Bloomberg’s Yalman Onaran wrote.
Subrahmanyam also noted other factors in Japan’s lack of growth, such as deflation and an aging population.
“But growing economies, which are innovative, usually have stock markets that do quite well in the long run,” Subrahmanyam said.
The American markets are one of them. But, of course, there have been lows and periods of stagnation.
Detrick said that between 2009 and 2020, the S&P 500 gained almost 400%. But he noted that shares were flat in 2011 and 2015, and down in 2018.
“There can be extended periods, years, honestly, where they don’t increase,” Detrick said.
He said the stock market had risen since last March, when stocks initially fell due to the COVID-19 crisis.
“I think people are blessed to think that’s how it normally is. And it is not. But again, for a long-term investor looking at, say, 20-25 years, stocks are absolutely one of the best ways to build wealth and beat inflation, ”he said.
Subrahmanyam also issued a note of caution, saying no one can predict how the stock market will perform over the next two years.
“It’s very tempting to go from the idea that the stock markets generally keep going up, to the idea that over the next couple of years, if I invest in the stock market, my wealth will surely increase. This is wrong, ”he said.