Understanding The Real Stock Market Return

From the 1940’s through the 80’s, the stock market did reflect the American economy. The growth of the market in the post-World War II years matched the stupendous expansion of manufacturing in America during that time. The market almost ground to a halt in the turbulent 60’s and 70’s where corporations were rather anemic.

However, the boom in the last two decades of the 20th century did not have as much to do with the economy improving as it did with the amount of money dumped into the stock market. You see, financial thinkers tried to figure out how to infuse the stock market with large influxes of cash. When you got past institutional investors and the few people who had more money than they knew what to do with (the usual investors in the market), all you had left were the common folk. They never really had any means to get into the stock market. This was the target group that those running the markets wanted.

What ended up happening was that the government passed several laws that allowed the development of products that we take for granted today. The IRA, 401K, and other qualified investment programs came into existence. These allowed the establishment of different financial vehicles that allowed investment in stocks. For the most part, this happened through stock mutual funds, and massive amounts of cash poured into the stock market.

This completed the transition from the stock market being a somewhat accurate barometer of the corporate strength of the nation’s companies to becoming an artificial entity. Its gains and losses had more to do with the proliferation of money available to invest in the stock market, rather than the performance of the companies on the stock exchange. You often hear financial and political commentators say there is a disconnect between Wall Street and Main Street (meaning how well the stock market is doing compared to the average American’s income.) This is where that disconnect began.

This up to some extent an artificial stock market boom lasted for a good twenty years. It is arguably one of the longest periods of prosperity in stock market history. It came to a grinding halt during the first decade of the 21st century. America had the tragedy of 9/11, the wars in Iraq and Afghanistan, and uncertainty throughout all facets of the country. Then the recession of 2008 hit, and people discovered many of our financial institutions were built on a foundation of sand.

Obviously, in the first quarter of 2020, we all are got caught intoxicated in the longest running bull-market by the Coronavirus Covid-19 pandemic.

Now and in the future, the stock market has its own internal economics with almost no bearing on the actual strength of its underlying companies. Keep these historical lessons in mind as you look to invest in the stock market. It offers the potential for a good return, but it has its own particular volatility that can flare up and consume your investment.

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