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For as long as I can remember , people have been predicting the end of the stock market. Every year there is a new headline, a new expert, a new chart with a red arrow pointing straight down. This is the main forecast. The bubble is about to burst. Collapse is inevitable . If you listen to them all, you can assume that the market should have completely collapsed about 30 times over the past century.
And yet, here we are. Since 1926, the S&P 500 index has returned an average of about 10% annually. This means that $1 invested then would be worth tens of thousands today. This did n't happen because investors are geniuses. This happened because the business is growing. The stock market is not essentially a casino.
It is a collection of ownership interests and real companies that produce real goods and services. If you own part of a good business, and that business continues to make more money over time, eventually the market tends to notice. People love to talk about crashes, and to be fair , crashes do happen.
The market fell about 89% during the Great Depression. In 2000, the.com bubble wiped out trillions. In 2008, the global financial crisis nearly destroyed the banking system. In 2020, the market fell by more than 30% in a matter of weeks during the pandemic. So the real question is not why crashes happen.
They obviously happen. The interesting question is why the market continues to recover. The answer is simple and inconvenient for people who make money predicting death. People's productivity is increasing every day. Somewhere in the world, people are waking up and trying to build something a little better than what existed yesterday.
A faster computer, a cheaper battery, a more efficient factory, new software that replaces 10 workers. Multiply this process by billions of people over decades and you get economic growth. In 1950, the entire United States economy produced about $300 billion in GDP. Today it is over 26 trillion dollars.
This is almost a hundredfold increase . Along with this, corporate profits have also increased. American corporate profits now total about $2.7 trillion a year. As businesses continue to generate more profits, ownership of those businesses becomes more valuable. The stock market is simply a scoreboard of this process.
Take Apple, for example. In 1997, the company was on the verge of bankruptcy. Today, Apple generates almost a hundred billion in annual profits. Microsoft generates over 200 billion in annual revenue. These companies did n't grow because the stock traders were smart. They grew because engineers, designers, and managers created products that billions of people wanted to use.
Capitalism, for all its flaws, scales useful ideas very well. And it is this scaling effect that makes markets grow over long periods of time. Another reason why markets haven't completely collapsed is something that didn't exist 100 years ago. Central banks with enormous power. During the Great Depression, politicians did not fully understand how to stabilize the financial system.
Banks went bankrupt by the thousands. The credit disappeared . The economy collapsed. Modern governments have learned lessons from this disaster. In 2008, as the banking system began to collapse, the US government launched a $ 700 billion bailout program known as TARP. The Federal Reserve has lowered interest rates to near zero and created trillions of dollars of liquidity.
During the COVID crisis, global stimulus reached over $5 trillion . At one point, the Federal Reserve's balance sheet grew to nearly $9 trillion. This is an extraordinary number. When this much money enters the financial system, some of it inevitably flows into assets such as stocks, real estate, and bonds.
Liquidity acts like oxygen for the markets. When there is a lot of it, financial systems experience situations that could otherwise destroy them . I'm not saying this eliminates crashes. This is not true. Markets are still panicking. Investors are still behaving irrationally. Human psychology has n't improved much in the last few thousand years.
In fact, for that matter, technology has accelerated the spread of irrational behavior. Today, panic can spread around the world in a matter of seconds. One tweet can move billions of dollars. A Reddit forum can raise the share price of a bankrupt company by several hundred%. And yet, despite all this chaos, the long-term trend is still upward.
This is because the biggest driver of markets is not emotion, but performance. Productivity means figuring out how to produce more output with the same or fewer resources. Over the past century, productivity in the United States has grown at an average rate of about 2% per year. This may seem like a small thing, but complex calculations turn small numbers into huge ones over time.
Productivity growth of 2% per year for 70 years could transform entire economies. Think about it this way. In 1990, there were practically no smartphones on Earth . Today there are over 6.88 billion of them. In 1995, only about 16 million people used the Internet. Today, over 5 billion people are online.
Entire industries, cloud computing, digital advertising, e- commerce, artificial intelligence, didn't exist on a significant scale 30 years ago. These industries now generate trillions of dollars of value. The market reflects this expansion. Of course, investors themselves often do a poor job of generating these returns.
The average investor earns about 3-4% per year, which is significantly lower than the long-term market average of about 10%. Why? Because people tend to buy when prices rise and sell when prices fall. When markets are calm and boring, people ignore them. When prices explode , people get excited and rush to invest .
And when prices fall, fear takes over, and they sell everything. This is the financial equivalent of buying umbrellas after the rain stops. One of the most powerful forces in investing is compounding. If you invest money at 10% per year, it doubles approximately every seven years. Over the decades, this effect becomes extraordinary.
$1,000 becomes $2,000, then $4,000, then $8,000, then $16,000. Give compounding enough time and it starts to look like magic. But complex accrual requires patience, a quality that markets rarely reward in the short term. People want excitement. They want predictions. They want someone to tell them exactly when the crash will happen and exactly when the growth will begin .
The truth is that no one knows these things all the time. Neither hedge fund managers, nor economists , nor television analysts. Most of them just guess, using the best vocabulary. If you look at the history of markets, crashes usually happen when several ingredients come together . Excessive leverage, overconfidence and a shock to the system.
In 2008, it was housing debt. In 2000, it was Internet speculation. In 1929, these were margin loans. But even after these disasters, the system eventually recovered. Businesses continued to operate, workers continued to produce, entrepreneurs continued to build, and over time, markets recovered . This is something that people underestimate.
The economy is not a fragile glass sculpture that is forever broken. It is more like a forest. Fires happen, trees fall, but new growth constantly appears. Could the market collapse tomorrow? Of course, it can. Markets can fall 30%, even 50% faster than people expect. Volatility is the price of entry into long-term profitability.
But predicting a permanent collapse has historically been a losing bet, as the basic machine, human ingenuity, combined with capital, continues to operate. By the way, if you like this way of thinking, consider subscribing so you don't miss future breakdowns like this. Rational investment ideas are already quite rare.
Now let me leave you with something important. The market will always be dangerous. It will always be uncertain. Every decade brings new crises, new bubbles, and new predictions of doom. Interest rates change. Governments make mistakes. Investors periodically lose their minds . But underneath all this noise, something very simple is happening.
Business solves problems. People invent new tools. Productivity is increasing. And wealth accumulates slowly but inexorably. So every year someone stands up and declares that the whole system is about to collapse. And every year the world continues to build anyway. Which brings me to a simple observation.
After nearly a century of observing markets, the stock market is unpredictable. He is emotional. He's funny sometimes, and sometimes the stock market is a real son of a [ __ ] .
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