It is often said that the market is expected to go up in the long-term, even if it may be shaky in the short-term. The argument offered for this proposition is a simple visual picture of the S&P500 index.
I have two counter-arguments.
- Firstly, it seems much of this argument hinges on the abnormal growth of the past 10 years. Take a look at the same picture above, and cut off everything that happens after 2008. An investor looking at this chart in 2009 would see a massive growth since the 50s, but would they still be so confident that the market still has growth potential in it? Might they not instead think that the best is over, that they missed the "real" growth of the 20th century, and that it's all a bumpy Keynesian ride from here on out? Of course, that didn't turn out to be the case, but the point still stands: the "picture argument" collapses if one ignores just 10 years of data, which suggests it isn't as robust as it may seem.
- Let's assume that the market has always grown, with no bumpy rides at all, since forever. Why should that mean it will always grow? That is akin to taking a step towards a cliff, and not falling over, so you tell yourself "I haven't fallen over yet, so that means I can keep walking towards the cliff and never fall off!". Well, no, at some point you'll reach the edge and then fall. How do we know it isn't the same with the stock market? The market grows, until it doesn't. We're not throwing dice here, the market is not random, it grows based on reality, and that reality may change at any given moment. Indeed, thinking about it in this way, the argument that the market "always grows" may end up defeating itself! Because if people end up believing that the market always grows, that will lead to people investing more of their money in the market, which will inflate the value of the market above and beyond its "actual" worth. At some point, that house of cards will come crashing down. Has it happened yet? No. But what reason is there to suppose that the cliff isn't out there?
My question is, what are the responses to these counter-arguments? What reason is there to expect that the stock market will continue to generate returns in the future, beyond the (unsatisfying) appeal to past performance?