Danger? A review of the post war history and future of stock markets...

70 years of investing in the stock market

Since the end of the Second World War, an investor who has managed to mimic?the performance of the US stock market reinvesting any dividends has pocketed 11% per annum gross of any fees or transaction costs (Figure 1). However, that c.70-year average obviously contains an array of shorter term experiences. (Figure 2) Past performance, as the regulator rightly warns, is not indicative of the future. Nonetheless, the message here is that markets have tended to reward patience.

In this week’s article, we explore some of the peaks and troughs of investing in the stock market in the post-war period alongside deriving any message we can use to orient ourselves today.

What drives returns?

The long-term returns from owning a slice of the world’s companies is driven by the growth of the world economy. Shareholder profits and global growth do not track each other precisely over the shorter term for a range of reasons. However, over the longer term, it is the degree to which the world and all of its citizens can make more output from a given set of inputs (productivity), that drives shareholder returns. This magic trick is most easily understood as coming about from the interaction of new technology (from Excel spreadsheets to the latest advances in Artificial Intelligence) with the learning curve (our collective capability to find new ways to apply that technology ever more efficiently).?

As we have pointed out many times before – you can neither predict where or when these technological breakthroughs nor which parts of the global economy (by country, industry, or sector) they will be most beneficial to. History teaches plenty of humility on both counts. In that context, the most important point, as suggested above, is to make sure that you are always both fully invested and diversified.

In the shorter term, there are all sorts of other, less predictable forces at work. Shifts in regulatory, political, societal, or macro-economic backdrop can reward parts of the stock market over others. The sudden, perhaps temporary, flip to a world that is on balance more worried about inflation has reversed the leader-board of the last decade (Figure 3).

Three great bull markets

1945 – 1968 – the post-war boom

There were two major forces at work in the post-war surge in stock market returns. First, this was a strong period for growth amidst the US baby boom and productivity growth fuelled by a proliferating array of innovations. Supercharging this effect for investors was a decline in some of the perceived risks associated with owning companies – valuations rose.

By the mid-to-late 1960s, the bull was running into the sand. The macro-economic backdrop was turning decidedly less friendly. The quality growth stocks of the era – the ‘nifty fifty’ – were becoming too popular. The spectre of 1970s stagflation loomed, garnished by multiple political and economic shocks.

1982 – 2000 - the great moderation

Following the Augean clear-out of the 1970s, stock markets began their second post-war surge in the early 1980s. This was again fuelled by the march of productivity growth. However, the returns to the endless drip of inventions and their assimilation into the economy was supercharged this time by victory in the then epochal battle against inflation. (Figure 4). Paul Volcker, legendary US central banker, was instrumental in this victory, raising interest rates to 20% in March 1980. Steepling interest rates proved an important part of the cure. Inflation expectations moderated sharply, and from then on inflation and interest rates operated at less eye-catching levels for much of the ensuing decades. This moderation allowed for valuation expansion to play an important role in the surging returns of the era.

2009 – 2020 - disinflation and the return of the US technology sector

Following the devastating global economic heart attack inflicted by the Global Financial Crisis (GFC), the stock market finally bottomed in early 2009. As usual, the stock market bottomed at a moment that did not feel like a very attractive moment to invest. In fact, if you could have seen in advance the societal and other turmoil that lay in the GFC’s wake, you certainly would have spent much of this bull market on the side-lines. The break-up of the European project, the rise and rise of the extreme ends of the spectrum, perpetual worries about government debt loads, a China crash, trade wars… However, the birth of a new cluster of technology titans, surfing the information revolution, provided much of the earnings fuel and valuation expansion provided the rest (Figure 5). It took an era defining pandemic to finally fell this bull.

2022 -

The pattern in this post-war story may suggest that we are due a patch in the wilderness before notable direction returns. There is obviously no requirement for that to be the case. Many important aspects of the world already look unrecognisable from the decades that led up to this point. Rather than battling deflation with almost everything at their disposal, central bankers are now battling its opposite – desperately trying to put the genie back into the bottle.

This makes for a very different starting point for this new economic cycle, in many ways a lot less auspicious in 2009 say. Then corporate margins were low, as were valuations. The bond market offered returns that we only dream of today even after the violent sell-off year to date. Today, the opposite is mostly true – high margins, high valuations, and low interest rates mean that we should be ready for lower returns from this point.

However, that should be less of a cause for despondency than some argue. The main driver of returns is new technology and its useful assimilation into the wider economy. The best way to take advantage of this over the long term is to own the companies which benefit. Most of the time, it is very hard to see in advance which sectors and geographies will triumph ahead of time. The answer to this is to make sure that you have the world working on behalf of your precious savings day and night, not just some recently successful part of it. Past performance really can be a very poor guide to the future.?

Find out about our '?Ready-made investments ' via our Smart Investor platform. A selection of five Barclays funds that each aims to increase the value of your investments over time, using a broad mix of asset classes from across the globe.

Or

Learn about?Barclays Wealth Management , the affluent and high net worth service provider for Barclays UK.

*This article is for information purposes only. It is not intended as a product offer or investment advice