44–Lever #4: Interest Earned (Part Five–Stock Market History)
History does sometimes repeat itself
If you’re new to investing or still wondering whether it’s a big casino, it helps to zoom out and see the big picture before getting into the specifics.
Some people find the stock market scary. It sometimes feels like one big crapshoot. If it doesn't, and you invest in it, it surely will eventually. Yes, the stock market goes up and down—sometimes wildly. But there’s one thing you should never forget: Over long periods, the stock market has always gone up. (Yes, I said, always; it just depends on how long a period we’re talking about.) So let’s talk about why that’s true, how history confirms it, and what it means for you as a next-gen steward of your finances.
Before there was a stock market, there were stocks (duh!). Stocks are simply units of ownership in a company, also known as shares of stock or equities. When you buy a share of stock, you’re purchasing a partial ownership stake in a company, entitling you to earn more money as the company does. (Your stock can also decrease in value for a variety of reasons.)
Selling stock is one of the primary ways companies raise capital to fund their operations. Buying stock makes you a part owner, even if it’s only one one-millionth of the company. That’s why stock markets were created–to enable companies to sell shares to the public, and for stock owners to buy and sell shares from each other in an open marketplace.
The stock market is a crazy thing, but it’s not a big mystery. It’s simply a giant collection of publicly-owned businesses, meaning they sell stock. When you (Mr., Miss, or Mrs. Public) buy shares of stock, you're buying a small piece of those companies. That means you become a part-owner, not just a saver. Think of it like this: every time someone opens a Chick-fil-A, launches a new app, or builds a better electric car, new value is added to the market. And because businesses, on the whole, exist to grow, the market tends to grow, too.
Sure, some grow faster than others, and some fail. But for all who fail, there are those who succeed, and some succeed spectacularly and are successful for many, many years, sometimes decades.
The earliest stock exchanges date back to the 18th century. They were established to facilitate the buying and selling of securities. The Philadelphia Stock Exchange, founded in 1790, was the first, but the more prominent New York Stock Exchange (NYSE) was established in 1792 when 24 brokers signed the Buttonwood Agreement. Over time, other exchanges emerged, including the American Stock Exchange (AMEX) and the National Association of Securities Dealers Automated Quotations (NASDAQ), which was launched in 1971 as the world’s first electronic stock market. Here’s what the two largest look like today:
NYSE: The oldest and largest exchange, home to big names like Coca-Cola, Walmart, and Disney.
NASDAQ: Known for its tech-heavy focus—think Apple, Microsoft, Amazon, and Tesla.
When people say "the market," they’re usually talking about U.S. stocks. But there are actually several types of markets and major stock indexes. Market indexes were created to track stock performance in aggregate.
Since we’ll talk about stock market indices in a future article on index funds, I only want to introduce them to you here. A stock market index is like a measuring stick for a group of companies. It helps you track how a segment of the market is performing over time. You can’t invest directly in an index since it’s not a tradable fund; it’s a “virtual basket,” but you can invest in funds that track them. Here are the biggies:
The Standard & Poor's 500 (S&P 500) was introduced in 1957 and comprises the 500 largest publicly traded companies in the U.S. It represents approximately 80% of the total U.S. stock market value, making it the primary benchmark for long-term investors. Some examples are Apple, Microsoft, Amazon, and Johnson & Johnson. If you invest in an S&P 500 index fund, you’re buying a slice of America’s biggest and most successful businesses.
The Dow Jones Industrial Average (DJIA), which was introduced in 1896, tracks 30 large, blue-chip U.S. companies. It’s one of the oldest indexes (from 1896), but not as broad or diversified as the S&P 500. Examples here are Boeing, Goldman Sachs, McDonald’s, and Home Depot. It mainly comprises older, established companies, but remains highly relevant to many investors, such as retirees like me.
You’re probably most familiar with the NASDAQ Composite, an index of 3,000+ stocks listed on the NASDAQ exchange. It was established in 1971 and created to reflect the performance of the growing number of tech-oriented companies; it remains heavily weighted toward tech and growth companies. Some familiar names are Meta, Google, Nvidia, and Netflix. It’s excellent for tracking tech innovation, but more volatile than the S&P 500.
One of the most important is the Total U.S. Stock Market (CRSP, Russell 3000, etc.) This relatively new index encompasses all publicly traded U.S. companies, ranging from giants to small firms. It’s unique in that it provides exposure to the full American economy. It contains the same companies as the S&P 500—plus thousands more like regional banks, small retailers, and emerging startups. A total market fund is akin to owning the entire U.S. economic engine, from top to bottom.
Finally, there is the International and Emerging Markets index—the Morgan Stanley Capital International Europe, Australasia, and Far East Index (MSCI EAFE) Index, which was established in 1969. It includes the stock markets outside the U.S., such as those in Europe, Japan, China, India, Brazil, and others. It’s important because U.S. companies aren’t the only ones growing; global diversification spreads your risk around. Some good examples of larger companies in this index are Nestlé (Switzerland), Toyota (Japan), and Alibaba (China). An S&P 500 fund only gives you U.S. exposure. International funds help you invest globally.
Now that you understand the markets and the different indices, let’s take a quick trip through time. Since I have been “in the market” for about 40 years, I can tell you with some authority that it has been quite a ride. “Rocky” is the word that comes to mind, but, as you’ll see, there’s much more to it than that.
Here's a chart that shows how the U.S. stock market—represented here by the S&P 500—has behaved over the decades:
The thing that should stand out to you the most is not the number of times there’s been a boom or a bust, or how much the market has gone up or down; it’s that it has gone up dramatically over the last 90 years or so. If we were to zero in on any of these periods of high volatility, you would see extreme ups and downs that only look like humps on the historical plot. That’s why I repeatedly say, “Because you’re young, time is on your side.”
You should note that the chart above is not on a log scale. If it were, it would look like this:
Note that the upward slope of the curve isn’t as great, but I think you get the point. I would like to discuss the overall trend and performance further, but first, I would like to provide a brief overview of the history of its ups and downs.
1920s–1930s: The Crash and the Great Depression: Yes, the market crashed big time in 1929, marking the beginning of the Great Depression. Stocks fell by over 80% from their peak. It took over a decade to fully recover, but it eventually did. And anyone who continued to invest during that time? They ended up doing very well.
1940s–1950s: Post-War Growth: After World War II, the economy boomed. So did the stock market. New technologies, suburban growth, and industrial expansion lifted corporate profits and investor returns.
1960s–1970s: Volatility and Inflation: These decades brought social unrest and change, the Vietnam War, and sky-high inflation. Markets were rocky. But again, investors who stayed in the game came out ahead.
1980s–1990s: The Internet and Dot-Com Booms: Fortunately for me, this is about the time that I started to get serious about investing. The market took off in the ‘80s and ‘90s. Personal computers, the internet, and global trade drove profits to soar. The S&P 500 delivered double-digit returns year after year. Even after the dot-com bubble burst in 2000, the market eventually rebounded and hit new highs.
2008: The Global Financial Crisis: I endured the Dot-Com bust, but nothing prepared any of us for this one. The housing market collapsed. Banks failed (including the one I worked for!), and stocks plummeted over 50%. It was one of the scariest financial moments in modern history. Many investors bailed out of the market altogether, and some never returned. However, due to bailouts and the Fed’s “quantitative easing,” the market fully recovered within five years and continued to climb.
2020: COVID-19 and the Fastest Crash and Recovery Ever: The pandemic caused a sudden crash. But it was also the fastest rebound ever. By mid-2020, stocks were already reaching new highs. This was followed by inflation, Fed rate hikes (known as “quantitative tightening”), and increased volatility. Yet again, the long-term upward trend remained intact.
I already alluded to this, but the key takeaway here is that over the last 90 years, the U.S. stock market (S&P 500) has returned about 10% per year, on average. Still, as the charts clearly show, that doesn’t mean every year is good. Some years are bad—really bad. But over 10, 20, or 30 years, the market has always gone up. As this chart shows, only a handful of 10-year rolling periods have had a negative return. (According to Investopedia, “Rolling returns are annualized average returns for a period, ending with the listed year.)
Also of note: 100% of 20-year rolling periods since the 1920s have been positive, even if they started in terrible times like 1929 or 2000!
You may be wondering why it keeps going up (and whether it will continue to do so). Those are reasonable questions. This primarily relates to how our capital system operates. Well-financed and operated businesses tend to grow, and so do their profits and, therefore, their stock prices. Population growth, resulting in greater demand, and market expansion, driven by global trade, also contribute. If companies reinvest their earnings (in the form of dividends), they may grow more rapidly. And finally, innovation (in tech, biotech, and AI) is continually creating value and prompting new companies to enter the market.
Ultimately, it’s our God-given gifts of intelligence and creativity, paired with hard work, high productivity, and long-term ownership of both public and private companies, that help fuel growth as well. That said, I’m reasonably sure the market will crash again, someday–I just don’t know when. But history—and basic economics—tell us that it will also come back again, perhaps with a vengeance.
So, what does all of this mean to you? It doesn’t mean you need to rush out and plow a bunch of money into whatever seems to be the hottest stocks right now. Better to come up with a personal investing strategy that suits your goals and temperament and that uses a diversified mix of low-cost mutual funds. Then, I think you can be confident that steady, long-term investing in the market will lead to growth, as it has for generations past. That’s what I’ll help you with in the following few articles.
For reflection: As stewards, we know that God owns it all (Psalm 24:1), and we’re called to manage His resources with wisdom and patience. The market can’t be trusted like God can, but we can wisely use it to prepare for the future. Just like sowing a seed and waiting for the harvest, investing requires faith, time, and perseverance. Avoid shortcuts. Ignore hype. Invest wisely.
Verse: “The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty” (Proverbs 21:5, ESV).