70 years of investing in the stock market

As the UK celebrates the Queen’s Platinum Jubilee, we take a look back over the past 70-odd years of investing in stock markets. Since the end of the Second World War, an investor who has managed to mimic the performance of the US stock market reinvesting any dividends has received 11% per annum gross of any fees or transaction costs. However, that c.70-year average obviously contains an array of shorter term experiences. While markets have tended to reward patience, it is important to remember that past performance is not a reliable indicator of future performance.

What drives returns?

The long-term returns from owning a slice of the world’s companies is driven by the growth of the world economy. Shareholder profits and global growth do not track each other precisely over the shorter term for a range of reasons.

However, over the longer term, it is the degree to which the world and all of its citizens can make more output from a given set of inputs (productivity), that drives shareholder returns. This is most easily understood as coming about from the interaction of new technology (from Excel spreadsheets to the latest advances in Artificial Intelligence) with the learning curve (our collective capability to find new ways to apply that technology ever more efficiently).

You can neither predict where or when these technological breakthroughs nor which parts of the global economy (by country, industry, or sector) they will be most beneficial to. History teaches plenty of humility on both counts. In that context, the most important point is to make sure that you are always both invested and diversified.

In the shorter term, there are all sorts of other, less predictable forces at work. Shifts in regulatory, political, societal, or economic backdrop can reward parts of the stock market over others. The sudden, perhaps temporary, flip to a world that is on balance more worried about inflation has reversed the leaderboard of the last decade.

Three great bull markets

1945 – 1968: the post-war boom

There were two major forces at work in the post-war surge in stock market returns. First, this was a strong period for growth amidst the US baby boom and productivity growth fuelled by a proliferating array of innovations. Supercharging this effect for investors was a decline in some of the perceived risks associated with owning companies – valuations rose.

By the mid-to-late 1960s, the bull market (where prices are rising) was running into the sand. The economic backdrop was turning decidedly less friendly. The quality growth stocks (those companies expected to grow sales and earnings at a faster rate than the market average) of the era were becoming too popular. The spectre of 1970s stagflation (a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high) loomed, garnished by multiple political and economic shocks.

1982 – 2000

Stock markets began their second post-war surge in the early 1980s. This was again fuelled by the march of productivity growth. However, the returns to the endless drip of inventions and their assimilation into the economy was supercharged this time by victory in the battle against inflation. Paul Volcker, legendary US central banker, was instrumental in this victory, raising interest rates to 20% in March 1980. Inflation expectations moderated sharply, and from then on inflation and interest rates operated at less eye-catching levels for much of the ensuing decades.

2009 – 2020

Following the devastating global economic turmoil inflicted by the Global Financial Crisis (GFC), the stock market finally bottomed in early 2009. As usual, the stock market bottomed at a moment that did not feel like a very attractive moment to invest. In fact, if you could have seen in advance the societal and other turmoil that lay in the GFC’s wake, you certainly would have spent much of this bull market on the sidelines. The break-up of the European project, perpetual worries about government debt loads, a China crash, trade wars. However, the birth of a new cluster of technology titans, surfing the information revolution, provided much of the earnings fuel and valuation expansion provided the rest. It took an era defining pandemic to finally fell this bull.

2022 - Present

The pattern in this post-war story may suggest that we are due a patch in the wilderness before notable direction returns. There is obviously no requirement for that to be the case. Many important aspects of the world already look unrecognisable from the decades that led up to this point. Rather than battling deflation (a decrease in the general price level of goods and services) with almost everything at their disposal, central bankers are now battling its opposite – desperately trying to put the genie back into the bottle.

This makes for a very different starting point for this new economic cycle compared to 2009. Then, corporate margins were low, as were valuations. The bond market offered returns that we only dream of today even after the violent sell-off year to date. Today, the opposite is mostly true – high margins, high valuations, and low interest rates mean that we should be ready for lower returns from this point.

However, that should be no cause for despondency. The main driver of returns is new technology and its useful assimilation into the wider economy. The best way to take advantage of this over the long term is to invest in companies which benefit. Most of the time, it is very hard to see in advance which sectors and geographies will triumph ahead of time. The answer to this is to make sure that you have the world working on behalf of your investments day and night, not just some recently successful part of it. Past performance really can be a very poor guide to the future.

Where to invest?

If you’re ready to invest but are short on time or need some inspiration, you might want to consider one of our five Ready-made Investment funds. You don’t need to be an expert – our team of professionals create and monitor our funds. The Ready-made Investments are just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These Barclays multi-asset funds invest in passive funds (a fund which tracks a market index, or a specific market segment, and usually has lower fees than the equivalent actively managed fund) across a range of asset classes and regions, offering a globally diversified solution for investors. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone.

Source: FactSet, Barclays

Note that past performance is not a reliable guide to future performance.

As always, these are our current opinions but the future, as ever, is uncertain and outcomes may differ. We don’t offer personal investment advice so if you’re unsure you should seek that independently. Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

Read the Assessment of Value report for funds run by Barclays. [PDF, 5.3MB]