Long-time readers of the blog are familiar with my long-running series (and sidebar data) on The Trend, which puts short-term swings in the U.S. stock market into perspective vs. its long-term performance.  Being that stock prices have fallen considerably (about 20% since the start of the year, about 14% from a year ago), folks may naturally be concerned what this means and whether people relying on their savings have been getting poorer by the minute.

The point I keep trying to make is that, over the long haul, the U.S. stock market yields (less dividends) about 7 percent a year.  Some years are better, some worse, but over time the market abides by this rate of return.  I hate to put it in terms of “this is all we deserve” but the performance of investments over decades suggests that this is the case.  We can’t help but come back to the trend line.  It reflects how human capitalists judge risk.

The chart below is my latest update on how stock prices of the largest U.S. companies have fared vs. the long-term (1950-2012) trend.  The areas in red show when stock prices were inflated relative to their long-term trend, while the areas in green show when stock prices were depressed:What this chart tells us is, even with this year’s losses, the stock market remains ahead of where we should expect it to be.  Trump juiced it up in 2018 with his corporate tax cuts; pandemic relief legislation and absurdly low interest rates pumped tons more money into the financial system, which found its way into crypto and tech stock speculation.  These bubbles are now deflating, but they haven’t been flattened.  There may be more to come.

The temptation is great, after a given year in which the value of your retirement savings might have gone up 20% to 30%, to believe that those gains are locked in and they are forever yours now.  Sorry, no.  The market has no Maxwell’s Demon that keeps one from losing statistically-outsized gains.  The Trend will, eventually, have its say.