The Market’s Singular Direction: Upwards – A Historical Perspective

Hey there, fellow investors! Have you ever thought about the remarkable consistency of the stock market’s upward journey? It’s a fascinating phenomenon that often leaves us wondering: why does the stock market performance seem to defy gravity, rising higher and higher despite occasional dips and dives in a bear market?

Join me on a journey through time and data as we explore this enduring enigma together. In this article, we’ll delve into the history of major stock indices, uncovering the hidden drivers behind their relentless ascent. From there, we’ll explore its underlying mechanisms like compounding and utilize insights and strategies to confidently ride the market’s waves in our next article. All this will improve our journeys towards financial independence or a remarkable passive income. I will show you why there is no real danger in investing if you have a plan, if you stick to your plan, and if you keep cool sometimes.

Historical Data

A historical look at some of the major stock indices, such as the S&P 500 and the Dow Jones Industrial Average, reveals a remarkable trend within the financial markets. Over the past century, these indices have experienced substantial growth, punctuated by periodic setbacks. It’s worth a look, even though past performance cannot predict future results.

I will focus on US indices as an example as it is today’s dominating economy which is greatly illustrated by the S&P 500 and the Dow Jones Industrial Average (DJIA).

Let me show you a graph and let me tell you some additional motivation to write this article. The picture above depicts the graph from the S&P 500 back from 1957 until today. It’s a logarithmic scale and the underlying assumption is that the dividends are reinvested.

On our F.I.R.E. journey, I often get asked why we as a family invest that much money. “Are you not afraid of losing money, Marc?”. My simple answer to that is: Why should I? I can only win in the long term unless the monetary system we live in significantly changes. The fact that we have a long-term plan and an emergency fund for times when the market is correcting downwards gives me so much peace of mind for our monetary goals. You do not need any further technical analysis, a moving average or other fancy technical indicators. You could carve out any 30-year period of that chart you want and the result would always be rising trend lines and: Profit! What a beauty that chart is. It’s close to a straight line.

Now let us explore some additional historical data about the S&P 500 and it’s “brother”, the Dow Jones. Let us also analyze some significant events that caused severe panic within the markets. In the long-term these events have no significance anymore since the markets recovered. But they for sure embrace the importance of having a consistent long-term plan.

The Dow Jones Industrial Average

The Dow Jones Industrial Average (DJIA), established in 1896, began with 12 companies and an initial value of 40.94 points. Today, the DJIA includes 30 companies and has grown to over 40.000 points in 2024. This growth reflects the increasing value and profitability of America’s largest corporations over more than a century. Significant milestones include crossing 1.000 points in 1972, 10.000 points in 1999, and 20.000 points in 2017. Each milestone was achieved despite intervening economic crises and downturns, such as the Great Depression, the oil shocks of the 1970s, and the 2008 financial crisis.

The S&P 500

The S&P 500, introduced in 1957, has grown from an initial value of 386 to over 4.000 points as of 2024. This index provides a broader measure of the market’s performance. Its growth trajectory reflects the collective success and expansion of a diverse set of industries, from technology and healthcare to consumer goods and energy. The S&P 500 has weathered significant events such as the Black Monday crash in 1987, the dot-com bubble burst in 2000, and the 2008 financial crisis. Yet it has consistently rebounded and reached a new all time high.

Comparison between the DJIA and the S&P500

The following table compares the main differences between the DJIA (Dow Jones Industrial Average) and the S&P 500 to give you insight about the significance of the two.

Stock Market Crashes And Bull Market Recoveries

The Great Depression (1929-1939)

The stock market crash of 1929, famously known as Black Tuesday, triggered the most severe economic downturn in modern history, marking the onset of the Great Depression. On Black Tuesday, October 29, 1929, the DJIA plummeted, losing nearly 90% of its value. From its peak of 381,17 points in 1929, it descended to its lowest level of 41,22 points in 1932, devastating market participants and causing widespread financial ruin. However, amidst the despair, the global economy eventually embarked on a slow and arduous path to recovery. By the early 1950s, the DJIA not only regained its pre-Depression levels but also surpassed them, symbolizing resilience and renewal in the face of catastrophic economic collapse.

The Oil Shocks (1970s)

The oil shocks of the 1970s were transformative events that reshaped global economics and geopolitics. The first shock in 1973 was triggered by the Yom Kippur War, leading OAPEC to start an oil embargo against the US and other Western nations. This caused oil prices to quadruple, sparking global inflation and economic recession. It also made clear how dependent on oil the West got after World War II.

The Dow Jones Industrial Average (DJIA) experienced significant declines. The DJIA dropped from around 960 points in early October 1973 to about 580 points by December 1974, marking a loss of nearly 40%. Similarly, the S&P 500 index fell sharply, losing around 48% of its value from early 1973 to late 1974. This period saw one of the most severe bear markets since the Great Depression, reflecting the broader economic turmoil caused by the oil crisis.

The second shock in 1979 followed the Iranian Revolution, which disrupted oil production and doubled oil prices, exacerbating inflation and economic stagnation (stagflation). These crises highlighted the West’s dependency on Middle Eastern oil, prompting shifts towards energy conservation, diversification, and alternative energy sources. They also intensified geopolitical focus on the Middle East and influenced long-term economic policies, environmental awareness, and energy strategies.

The second oil shock also led to notable market volatility. In 1979, the Dow Jones saw fluctuations but managed a modest gain for the year, closing at around 838 points. However, the impact of rising oil prices and economic uncertainties caused the market to remain volatile and under pressure. The S&P 500 showed a similar trend, with fluctuations throughout 1979, reflecting investor concerns over inflation and economic instability. Despite the volatility, both indices did not experience losses as severe as those during the first oil shock, demonstrating a market somewhat more resilient to the repeated oil price spikes.

The Black Monday Crash (1987)

The Black Monday crash occurred on October 19, 1987. The stock markets around the world experienced a sudden and severe decline. Starting in Hong Kong, spreading throughout Asia and Europe and finally reaching the U.S. stock market. The Dow Jones Industrial Average (DJIA) dropped by 22,6%, manifesting the worst single event, its largest single day percentage loss in U.S. history. This crash was partly attributed to the advent of computer-driven trading models, which amplified the market’s volatility.

Investor panic and a lack of liquidity also exacerbated the situation. The crash had a global impact, affecting markets in Europe, Asia, and Australia. In the aftermath, regulatory measures such as circuit breakers were introduced to prevent similar occurrences in the future. Despite the severity of the crash, the markets recovered relatively quickly, with the DJIA regaining its pre-crash levels within two years.

The Dot-Com Bubble (1995-2000)

The late 1990s saw a surge in technology stock prices, driven by speculative investments in internet-based companies. When the bubble burst in 2000, Wall Street was shocked. The tech-heavy NASDAQ Composite index from the New York Stock Exchange lost nearly 80% of its value by 2002. Individual investors lost 5 trillion USD up to that point, drastically worsening their financial situation. The S&P 500 also experienced significant losses, dropping by approximately 49% from its peak in March 2000 to its trough in October 2002. Despite this, the market eventually recovered, driven by genuine technological advancements, the growth of established tech giants, and a bull market after the correction downwards. The S&P 500 began to rebound in 2003 and fully recovered its pre-bubble peak by May 2007.

The 2008 Financial Crisis

Triggered by the collapse of the housing bubble and a subsequent banking crisis, the stock market saw a dramatic decline. The S&P 500 fell by over 50% from its 2007 peak to its 2009 bottom. However, coordinated efforts by governments, financial institutions like the central banks to stabilize the financial system, along with the resilience of businesses, led to a robust recovery. By 2013, the S&P 500 had regained its pre-crisis peak, and it continued to reach new heights in the following decade. It took 4 years for the S&P 500 to fully recover (2009-2013) but it experienced only 2 years of market downs (2007-2009).

The COVID-19 epidemic (2020)

The COVID-19 pandemic had a significant impact on the stock market by undermining nations and economies in the most effective ways. The impact was characterized by extreme volatility and sharp declines in stock prices. In early 2020, as the pandemic’s severity became clear, global stock markets plummeted, with the S&P 500 dropping about 34% from mid-February to late March, falling from around 3.380 to 2.230. The Dow Jones Industrial Average fell from about 29.500 to 18.200 in the same period. Unprecedented volatility ensued. Different sectors were affected unevenly, with technology and healthcare stocks generally faring better, while travel, hospitality, and energy stocks suffered significant losses.

Massive fiscal stimulus and monetary policy measures by the fed officials and their international counterparts, including interest rate cuts and asset purchase programs, helped stabilize the economy and markets, fueling a rapid recovery. By the end of 2020, the S&P 500 and NASDAQ reached new all-time highs, driven by optimism about economic growth and reopening, vaccine developments, and continued government and central bank support. The pandemic also accelerated trends like digital transformation and remote work, influencing long-term investment strategies. Overall, COVID-19 highlighted both vulnerabilities and the resilience of the stock market in facing unprecedented challenges.

In the next blog article, we’ll continue this analysis and dive deeper into the mechanisms and strategies for long-term success as a market participant. Until then, may your investments flourish, your families dreams soar, and your journey towards financial freedom be filled with fulfillment and abundance of Time and Money. Stay safe and keep investing friends!

As we bid farewell, I really hope I was able to shed some light on the history of the markets as well as their multiple comebacks so that you can make data-driven and well-educated investment decisions for improving your personal financial journey towards F.I.R.E. – Financial Independence Retire Early.

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