Is the Stock Market Likely to Remain Positive Over the Next 20 Years?

The Historical Perspective

When discussing the future of the stock market, it's crucial to base our predictions on historical data. For a detailed analysis, let's consider the performance of the Dow Jones Industrial Average over the past 120 years. This index has seen numerous significant events, including the Great Depression and the 1929 stock market crash. Despite these challenges, evidence suggests that the stock market has shown positive returns in most 20-year periods.

Data from 1897 to 2017 reveals that the Dow Jones Industrial Average has not experienced a negative return over any 20-year span, with a possible exception from 1917 to 1937. This period included the Black Thursday crash in 1929 and the subsequent Great Depression. During that time, the Dow's peak in 1929 was 381, which fell to a low of 41 in 1932 and 1933.

The insights we gain from this historical data come from Benjamin Graham's seminal work, The Intelligent Investor. His analysis provides a framework for understanding the long-term trends and resilience of the stock market.

Global Perspectives and Variations

While the U.S. stock market shows a strong track record of positive returns, other global markets exhibit different trends. For instance, Japan's stock market has faced challenges over the past decades. During the 20-year period from 1989 to 2009, Japan's Nikkei 225 index did not recover to the levels seen 30 years earlier.

It's important to note that the figures are based on local currencies, which can provide a different perspective when adjusted for foreign exchange rates. For example, Japan's poor performance would look less severe in US dollars, and the U.S. performance would seem less positive in yen.

Furthermore, stock market indices are not always representative of individual investments. Each index has its own biases and skews, which can lead to discrepancies between macro trends and individual investor experiences.

Future Predictions and Considerations

Based on historical data, particularly from Robert Shiller's analysis dating back to 1921, the chances of a negative total return over the next 20 years are very low. The only 20-year period in which stocks had a negative total return was from July 1901 to June 1921, a time when the market was considerably different, with less diversity and no active Fed.

Even without a positive contribution from the Federal Reserve, it's highly likely that the stock market will maintain positive returns due to inflation. While there is always the potential for unforeseen disasters like economic collapse, technological innovations, or other global events, the overwhelming likelihood suggests that the stock market will continue to show positive returns.

Examining the SP 500 index, there have only been 7 out of 107 months (approximately 7%) when the market was lower at the end of 20 years than at the start. Even when adjusting for inflation, there were only 25 out of 384 months (approximately 7%) when it was lower. In almost all instances where bonds beat stocks, this was due to either the Great Depression or one of the two 21st-century stock market crashes.

Additionally, the Cyclically Adjusted Price Earnings (CAPE) ratio, which measures the market's valuation, is currently 29. Historically, when this ratio is above 25 at the beginning of a 20-year period, bonds have outperformed stocks 84% of the time over the following 20 years. However, this does not mean a negative return for stocks is certain; even if stocks lose to bonds, they are unlikely to experience a negative nominal return.

While the stock market's performance over the next 20 years may not be guaranteed, the historical evidence supports a positive outlook. Investors should consider these factors when making long-term investment decisions, keeping in mind the inherent unpredictability of global events and economic conditions.