Why the US stock market has gone up over the past decade
![Why the US stock market has gone up over the past decade](https://media.asiaone.com/sites/default/files/styles/article_top_image/public/original_images/Feb2020/20191122_tradingscreen_pixabay_1.jpg?itok=jEA_si3-)
Since the start of 2010, the US stock market — as measured by the S&P 500 — has nearly tripled, from 1,124 points to more than 3,300. This meteoric rise in US stock prices has prompted plenty of commentary within the investment community on its underlying drivers.
A frequent "culprit" cited is the Federal Reserve in the US.
Many investors and market commentators have blamed the US central bank for driving stock prices higher because of its interest rate policy (of keeping rates low) and quantitative easing (the act of pumping money into the economy via the purchase of mostly government-related financial assets).
I have rarely seen this being talked about:
The chart above is plotted with data from Nobel Prize-winning economist, Robert Shiller. It shows changes in the S&P 500's price, dividends, and earnings since the start of 2010.
Over the past decade, all three numbers have basically increased hand-in-hand. Put another way, the meteoric rise in the S&P 500 I mentioned earlier could be explained by a similarly big jump in the fundamentals of American businesses.
I was inspired to plot my chart after I came across the following tweet by Morgan Housel, one of my favourite finance writers:
Why the market went up. pic.twitter.com/sLpAUF9nfl
— Morgan Housel (@morganhousel) February 23, 2020
Housel's chart showed that the S&P 500's price and its dividends have climbed in lock-step since 2010. This suggests that the US market had been driven higher because of improvements in its underlying business fundamentals.
But I was curious to know if the increase in dividends is sustainable. This is why I plotted my own chart which included earnings growth. Turns out, there has been a commensurate increase in earnings for the US market. The S&P 500 has done what Warren Buffett wrote in his 2018 Berkshire Hathaway shareholders' letter:
"On occasion, a ridiculously-high purchase price for a given stock will cause a splendid business to become a poor investment - if not permanently, at least for a painfully long period. Over time, however, investment performance converges with business performance."
None of the above is meant to say that the S&P 500 will continue climbing over the next year, or the next 10 years.
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Over the short run, sentiment can change on a dime; a rise in investors' pessimism over the future - whether warranted or unwarranted - will drag stock prices lower.
Over the long run, if the rise in earnings for US businesses in the past was unsustainable, then there could be a collapse in the S&P 500 in the future.
But what we do know now is that there is a very good reason why US stocks prices have grown so much over the past decade - their businesses have done very well too.
This article was first published in The Good Investors. All content is displayed for general information purposes only and does not constitute professional financial advice.