Looking back: What does the ‘long term’ really mean?

Stock markets can be volatile, and some years they decline. But the ups far outnumber the downs—and returns are in line with two centuries of performance.

John Pierpont (J. P.) Morgan had a ready answer at the turn of the 20th century when asked how the stock market would perform: “It will fluctuate.” 1 And so it has for decades, and overwhelmingly for the better. As Jeremy Siegel, professor at the Wharton School of the University of Pennsylvania, details, stocks over the long run have returned an average 6.5 to 7.0 percent per year (after inflation) since about 1800. 2

When McKinsey on Finance was first released in 2001, the market capitalization of the companies that made up the S&P 500 Index was about $10 trillion. As of mid-June 2022—even after a bearish opening to the year—S&P 500 Index market capitalization was about $35 trillion. The mean total yearly returns (including dividends) of the S&P 500 Index from 1996 to mid-June 2022 is 9.0 percent in nominal terms, or 6.8 percent in real terms, right in line with Jeremy Siegel’s historical results (exhibit). On a nominal basis, returns for the MSCI World, Emerging Markets, and ACWI Indexes have had annualized returns of between 8 and 10 percent for decades as well.

Despite volatility, stock markets continue to earn returns in line with those of the past two centuries.
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While long-term TSR results have been in line with historical averages, Morgan was also right: the market does fluctuate. The S&P 500 Index declined in 2000, 2001, and 2002, followed by a 37 percent fall in 2008 and a 22 percent fall in the first half of 2022. But from 1996 to mid-June 2022, S&P 500 Index returns declined annually only five times (six if we assume that full-year 2022 will also result in an annual decline—as now seems likely).

A thriving stock market is a powerful, positive force for the economy. It creates wealth that can be reinvested in economic growth. Without this wealth creation and reinvestment, the economy (both around the world and in the United States) would be much poorer. Reasonable and largely stable long-term returns (as measured by low stock price volatility over ten-year periods) create conditions for greater opportunities. They encourage more individuals to invest in the stock market, which in turn provides capital for greater growth and broader wealth creation. This benefits not only investors but also society: returns are mostly reinvested, which drives even more economic growth.

It is a dynamic that generates more jobs—often ones that are less dangerous and more stable. For example, in the 1920s, about 25 percent of US jobs were in agriculture and about 40 percent were in manufacturing or other so-called blue-collar occupations. Today, only about 1 percent of US jobs are in farming or ranching, and only 20 percent of US jobs are blue collar.

Stock market returns foster competition and entrepreneurship as well, which leads to innovation and lower costs of products. Without the wealth creation and reinvestment encouraged by the free market, living standards both in the developed world and in emerging markets would be much lower.

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