Why Does the Stock Market Go Up Over the Long Term? » Claret (2024)

FAQs

Why Does the Stock Market Go Up Over the Long Term? » Claret? ›

The biggest reason the stock market goes up over time is because the economy grows and companies earn more money.

Because prices of all goods and services will rise forever and corporate profits will rise forever. Stock prices are a function of corporate profits, a multiple of earnings, anywhere from 10 times earnings to 35 times earnings, so if earnings rise forever, so do stock prices.

Confidence in the stock market can also push up demand and prices for individual stocks. If investors believe that stocks are a good investment, either because valuations are attractive or because the stock market has been trending upwards, an increase in demand for stocks can push up prices across the board.

Over the long term, the earnings power of a business will drive its stock price, for better or worse. Your return as an investor can be broken down into three parts.

Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour.

U.S. Stocks — 1926–2019

For the 94 years ended December 31, 2019, the S&P 500 Index posted positive calendar year returns 73% of the time and negative calendar year returns 27% of the time, with an average calendar year return of 21% over the positive years and -13% over the negative years.

The S&P 500 generated an impressive 26.29% total return in 2023, rebounding from an 18.11% setback in 2022. Heading into 2024, investors are optimistic the same macroeconomic tailwinds that fueled the stock market's 2023 rally will propel the S&P 500 to new all-time highs in 2024.

This means that the monetary value of a stock or share portfolio can appreciate over an inflationary period so that the 'real' wealth it stores – the goods or services it can be exchanged for – remains constant despite higher prices.

However, if you go out and sell stocks while they're down, you'll convert a potential loss to an actual loss -- and that's a move that could hurt you financially for many years to come. That's why now's really not the time to pull any money out of the stock market.

If there is a decrease in the supply of goods and services while demand remains the same, prices tend to rise to a higher equilibrium price and a lower quantity of goods and services.

Why do stocks always go up in the long run? ›

Well, the answer is fairly simple. The biggest reason the stock market goes up over time is because the economy grows and companies earn more money. Let's look at the largest stock in the market, Apple, as an example. In the year 2014, Apple had sales totaling $182 billion with a profit of $39.5 billion.

During the recession phase of the business cycle, income and employment decline; stock prices fall as companies struggle to sustain profitability. A sign that the economy has entered the trough phase of the business cycle is when stock prices increase after a significant decline.

Once a company goes public and its shares start trading on a stock exchange, its share price is determined by supply and demand in the market. If there is a high demand for its shares, the price will increase. If the company's future growth potential looks dubious, sellers of the stock can drive down its price.

The 11 am rule in trading refers to a guideline followed by some traders, particularly day traders, which suggests avoiding making significant trading decisions or entering new positions during the first hour of the trading day (9:30 am to 10:30 am EST) and waiting until around 11 am EST to assess market direction and ...

Key Takeaways

The Rule of 72 is a simplified formula that calculates how long it'll take for an investment to double in value, based on its rate of return. The Rule of 72 applies to compounded interest rates and is reasonably accurate for interest rates that fall in the range of 6% and 10%.

Best Time of Day to Buy Stock

The market should rise the most during the first two hours of the trading day after the opening, which is from 9:30 a.m. until 11:30 a.m. EST for the NYSE. The New York Stock Exchange's bell rings at the open and close of each trading session. Source: Verdin.

The power of compounding

Compounding is one of the reasons long-term investing can give such great returns – it's the snowballing effect of your returns generating more returns – win, win. Word on the street is that Albert Einstein called it “the eighth Wonder of the World.”

In other words, US stocks' outperformance is mostly explained by rising valuations. While rising valuations can keep rising for some time, investors should not expect a repeat performance. And at some point, rising valuations create increased risk.

If more investors are buying the stock than selling it, the demand for that stock goes up and the value tends to increase. This often results when investors believe the value of the companys stock will increase as a result of strong financial performance or other market factors.

The market has achieved several new all-time highs this year due to steady economic growth. Investors should continue to stay focused and invested and not make decisions based on the level of major market indices alone. Copyright (c) 2024 Clearnomics, Inc. All rights reserved.