What Drives the Market
We shouldn't expect stock prices to rise simply because they've risen in the past
Sometimes people ask why we should expect the stock market to rise in the future. Is there a logical basis for this expectation?
We shouldn’t just expect stocks to go up simply because they have, on average, always gone up in the past. Rather, there is a basis for expecting stocks to rise. In general, there are three components to stock market returns:
Dividends
Profit growth
Changes in investor sentiment
Simple as it looks, these fundamental building blocks are the reason why investors aren’t simply extrapolating when they assume that the market will continue to rise in the future. The rate of growth might be slower in the future than in the past—due mainly to slower population growth, which may translate to slower profit growth. But overall, I still expect stocks to rise. And that’s why stocks should be the starting point in building a financial plan for long-term growth.