April 16, 2021
This is my analysis on the long term trajectory of stocks, and what it would take to put us back on path of 8% annualized, from the pre-global financial crisis peak of 2007.
In the chart, the blue line represents what the S&P 500 would have looked like had it continued its long-run annualized growth rate of 8% from the 2007 pre-Great Financial Crisis peak. The orange line is the actual path of stocks.
Through the years of looking at this chart, there has been plenty of chatter about the performance and status of the stock market — plenty of bubble and overvaluation talk. But the reality is, we were knocked off of the path of the long-term trajectory of stocks (the orange line). And that path of a long-term 8% annualized appreciation has never been regained (the blue line).
What can we attribute this gap to? Post-recession recoveries are typically driven by an aggressive bounce-back in growth, to return the path of the economy to "trend growth." We didn't get it. Instead, the post-Great Recession growth environment was dangerously shallow and slow. Trump stepped in and focused on the economy. Growth was beginning to return to near trend growth — still not enough. And then, Covid.
So now, as we know, both the Fed and Congress have had the clear appetite to fire the bazooka of monetary and fiscal policy to pop growth. As such, we are finally beginning to see this gap (between the orange line and the blue line) close.
Still, we have another 10% to put us back on the path. And the long-term growth path for stocks would project a move to 4,999 by mid-next year.
Bottom line: The outlook for stocks remains very compelling.