The widespread increase in the cost of goods and services throughout the economy is referred to as inflation. Prices that grow gradually result in better long-term income and profit for businesses (all things equal). Additionally, a company’s stock value rises in parallel with an increase in sales and profit. Therefore, inflationary growth is responsible for a portion of the global increase in stock index levels.
One of the factors that make investing preferable to saving is inflation. Your asset values will rise along with inflation as an investor. However, if you save money, it will eventually lose value.
The aforementioned is only accurate, though, when inflation is minimal. The U.S. Federal Reserve claims that a yearly inflation rate of 2% is advantageous for the economy. On the other side, unchecked inflation, like that experienced in Venezuela and Zimbabwe, would cause uncertainty, hinder economic expansion, and encourage investors to search for possibilities elsewhere.
- Population Growth:
An estimated 7.8 billion people will inhabit the planet as of January 2021. And this figure is anticipated to rise before reaching a peak of 11 billion by the year 2100. A greater population often translates into a broader market that businesses can serve. And over time, the value of the companies that effectively sell to a more significant, expanding market increases
Additionally, more specialized labor and businesses may be supported by greater populations. A million-person small emerging economy, for instance, may be mostly made up of the manufacturing, agricultural, and raw resources sectors. However, an economy with a population of 100 million that is larger and more developed may brag of specialized businesses in technology, communications, banking, commerce, entertainment, tourism, professional services, etc.
Naturally, there are a few smaller economies that stand out as outliers, such as Singapore and Switzerland. However, a bigger population generally results in more economic growth and productivity, which leads to larger, more valuable enterprises.
According to statistics, we will have more geniuses and inventors the more people we have. The rate of human advancement and invention has also increased along with the growth in the global population. Technology has propelled human ability, efficiency, and output to unprecedented heights since the commencement of the Industrial Revolution in 1760.
Since factories and mills no longer needed to be built adjacent to rivers to get their water power, the steam engine’s applicability allowed them to be built wherever. Additionally, it resulted in the development of the railroad, which unlocked new horizons. The invention of the light bulb allowed people to work later into the night. The personal computer, the Internet, and smartphones were just a few of the hundreds of new technologies that were made possible by the meta-invention known as the microprocessor.
Achieving this accomplishment was impossible just 15 years ago, yet now, a youngster may carry and have access to all of the human knowledge in the palm of their hand. The organizations that march to the rhythm of progress will continue to do so as long as the human spirit and inventiveness continue to rise.
- Natural Selection:
The stock index always includes the top firms on the market, which is the third and final reason why the index increases over the long run. For instance, a U.S. firm must, among other factors, have a market valuation of US$9.8 billion and positive earnings in the most recent quarter and year in order to be included in the S&P 500. The next best company is prepared to take over if a firm doesn’t meet any of the requirements.
The rate at which new, more inventive businesses supplant established ones will increase along with the pace of technological and economic development. In actuality, the S&P 500’s average business longevity has decreased over time.
Today’s top five S&P 500 corporations are technologically advanced firms Apple, Microsoft, Amazon, Alphabet, and Tesla. General Electric, Exxon Mobil, Pfizer, Citigroup, and Cisco rounded out the top five in 2000. In 20 years, we won’t know what the biggest corporations are, but it won’t matter since they will still be counted in the index.
Investment in an exchange-traded fund that tracks a stock market index can be a successful long-term strategy for passive investors because the stock market often increases over the long term. The SPDR S&P 500 ETF has provided investors with an annualized return of 10.04 % since its launch in 1993. (As of Jan 2021). Given that individual businesses cannot guarantee their future performance, this method is only applicable to stock market investments as a whole.
Furthermore, as we have seen, not all stock markets are created alike. Stock markets only fundamentally increase when the underlying conditions are favorable for long-term development and innovation. Choosing the appropriate stock market index to invest in is essential.
The Exception to Long-Term Increase in Stock Market:
Not every stock market in the world has long-term growth. Japan serves as an example. Japan has been in what is known as the Lost Decade of economic stagnation since its asset bubble burst in 1991. But the “Lost Decade” has been going on for thirty years.
Japan, the birthplace of the Walkman and Shinkansen, hasn’t produced a significant new invention since its heyday in the 1970s and 1980s. Contrarily, the United States created the Information Age, which China is now attempting to lead with its 5G and fintech innovations. Japan’s stock index, the Nikkei 225, has scarcely increased during the past 30 years, yielding a CAGR of 0.73 % from 1991 to 2020 despite an ageing population and a deflationary economy.