The Stock Market Goes Higher In The Long Term

Look at the historical performance of the US stock market over the last 50 years. As we all know, stock markets are measured by indexes. In the case of the US market, the S&P 500 Index (SPX) and Dow Jones Industrial Index (INDU) are the two most common portfolio of stocks used to represent & measure the performance of the entire market.

The S&P 500 Index takes the weighted average price of the 500 largest stocks in the US market while the Dow Jones Index takes the weighted average price of the 30 largest companies in the US. Since the S&P 500's portfolio of stocks makes up over 70% of the total market's worth (capitalization), it is more representative of the whole market.

This is what you will you notice about the stock market's performance. While stocks may be volatile in the short-term, it always goes higher and higher in the long-term. The stock market is always on a long-term uptrend. This means that each low point is higher than the previous low and each high point is higher than the previous high!

What is the rationale for stock market prices to keep going higher and higher? Well, stock prices are driven by company profits. The higher the profits of a company, the higher its shares will be priced. Over time, inflation pushes prices of a company's products and services higher. For example, a cup of coffee today costs twice as much as it did ten years ago and you can bet it will be even more expensive in the year 2016. As the world's population grows and gets richer (especially in developing countries like China and India), there are more and more people that companies can sell their products to. Higher prices at higher volumes result in higher and higher profits for companies. This continuous growth in earnings over time keeps pushing stock prices higher.

Over the last 50 years, the S&P 500 achieved an annual compounded return of 12.08% with dividends reinvested. Does this mean that the stock market increased by 12.08% every year? Of course not! In fact, in some years, the S&P 500 dropped by 45% while in some years, it doubled in value. In the long run, your money would have increased by 12.08% annually.

Now, will the stock market continue to increase in the next 50 years? Will this uptrend continues? Well, not only do most people think it will continue, but many believe that it will increase at a faster rate! The stock market grew much faster from 1990-2000 than it did from 1980 to 1990. At the same time, 1980-1990 performed much better than 1970-1980. So, the best years of the stock market may be yet to come!