Are the Stock Markets designed to always Go Up?

Are the Stock Markets designed to always Go Up?

It seems almost too easy: invest money in the stock market, then sit back and watch your investment grow. Minimal effort is required, aside from occasionally checking your balance and feeling pleased with your gains. The notion that stocks are "designed" to appreciate over time has become common wisdom among investors.

But is this wisdom truly reliable? Several significant factors contribute to rising markets such as inflation policies, index construction, and government bailouts, none of which are coincidental. These elements are integral to the systems that govern our economies and the markets themselves.

In this article, we will explore the mechanisms that quietly drive markets upwards, the policies and behaviors that support these trends, and why even a market that appears “designed to go up” can still experience sudden downturns.

Warnings: Investing always carries risks, and there are no guarantees that any investment will appreciate in the long term.

What is the case for always rising

Numerous factors contribute to the long-term upward trend of the stock market. While these influences are not foolproof, they have consistently demonstrated their effectiveness over time.

Before diving into the discussion, lets take a look at the chart below. It illustrates the S&P 500's performance from January 1928 to March 2025. This demonstrates a remarkable increase of 1,632%. For example, a £100 investment would have grown to £1,732, not including dividends.

S&P 500 performance over 90 years. Source: Macrotrends.

Is this just because of “good business performance”  or are other things having a large impact on prices?

Inflation effects

When people say that stocks "go up," they typically mean that the numbers displayed on the screen are increasing. However, this doesn't always indicate that you're actually increasing your wealth.

It's important to distinguish between nominal returns (the raw numerical increases) and real returns, which reflect what your money can actually purchase after accounting for inflation.

Real returns are significant because inflation causes prices to rise. If your investments increase by 5%, but the cost of living also rises by 5%, you haven't gained any purchasing power.

Here's where it gets paradoxical: inflation not only erodes wealth but can also inflate it.

When prices rise, companies often charge more for their products, leading to increased revenues. This can result in higher profits (at least on paper). Since stock prices tend to track these profits, they often rise as well.

This phenomenon helps explain why markets can trend upward even when the economy appears stagnant. Stocks don't always beat inflation—there are many years when they don't but historically, they have often kept pace with it and occasionally outperformed it.

And while it might sound conspiratorial, there's a kernel of truth to the idea that the system is designed in a way that can diminish the value of cash over time.

Governments don’t just try to manage inflation; they need it. 

A bit of inflation encourages people to spend rather than hoard cash. It can also help reduce the relative value of national debt, making gross domestic product (GDP) appear more favorable.

Even central banks aim for a certain level of inflation. Both the Bank of England and the U.S. Federal Reserve have official inflation targets, which are not set at zero. They typically aim for around 2% per year, although actual inflation is often higher. This is not an accidental occurrence; it is a deliberate strategy.

A moderate level of inflation is considered healthy. It provides businesses with the flexibility to raise prices and wages. Additionally, it motivates consumers to make purchases, like buying a new fridge today, before prices go up tomorrow.

Central banks and governments backstop

Stock markets don't rise solely from sheer willpower; policymakers often play a key role. When economies falter or markets crash, central banks like the Bank of England or the U.S. Federal Reserve  intervene.

They typically cut interest rates to make borrowing cheaper and can also inject money directly into the financial system through a process known as "quantitative easing." This involves buying bonds and other assets to flood the system with cash. When savings yield little and borrowing costs decrease, investors often shift their focus to stocks.

We witnessed this phenomenon after the 2008 financial crisis and again during the 2020 pandemic. Markets that appeared broken rebounded sharply once central banks took action. Nothing calms a panicking market quite like the promise of free money.

In severe crashes, government bailouts (such as the £65 billion in taxpayer money that was allocated to RBS and Lloyds back in 2008) and stimulus payments have helped keep companies a float.

In the U.S., there is even a term for this: the "Fed Put." This suggests that the market anticipates central bank intervention to provide a support level for falling prices when conditions worsen. It's akin to walking a tightrope with the reassurance of a giant safety net below.

One could argue that while the potential for growth is infinite and uncapped, the chances of complete disaster are somewhat mitigated. This may indicate an imbalance between the likelihood of long-term growth and decline.Stock markets don't rise solely from sheer willpower; policymakers often play a key role. When economies falter or markets crash, central banks like the Bank of England or the U.S. Federal Reserve intervene.

Understanding Survivorship Bias in Indexes

When people refer to "the market" rising, they typically mean an index like the S&P 500, the FTSE 100, or a global benchmark such as the MSCI All-World Index.

These indexes are not fixed; they are updated multiple times a year. This process is similar to a football league where the lowest-performing teams are relegated and replaced by rising clubs. Over time, this constant renewal improves the overall quality of the league. The same principle applies to indexes, which end up tracking the successful companies while quietly removing the underperformers.

By removing the weakest performers, these indexes are no longer negatively impacted by them. What remains are companies that have, by definition, either survived or excelled in their performance. This helps explain one of the reasons why indexes have generally risen over the long term.

Effective Approaches to Boosting Company Share Prices

Public companies have compelling reasons to keep their share prices rising, as higher prices often lead to increased compensation for their executives. Many times, stock options and bonuses are tied to the company's share price.

To support this goal, companies employ several strategies: they reinvest profits to fuel growth, they cut costs to improve efficiency, and they distribute dividends to shareholders. One common strategy is the share buyback.

A share buyback occurs when a company purchases its own shares from investors. This reduces the number of shares available on the market. As a result, if the company's profits are distributed among fewer shares, each share becomes more valuable. It's similar to exchanging a crowded pub lunch for an intimate ten-seat chef's table.

Many large companies invest billions in buybacks, especially during challenging times. Share buybacks also signal to investors that the company is confident enough in its performance to allocate its cash in this way.

Additionally, company directors have a legal obligation to act in the best interests of shareholders.

In the UK, the Companies Act 2006 mandates that directors promote the success of the company for the benefit of its members. This fiduciary duty enhances the focus on long-term growth and shareholder value.

Investor confidence is increasing

Investor behavior contributes to the stock market's upward trend. Over time, people have come to believe that investing in stocks, while risky in the short term, tends to reward patience. This belief creates a self-fulfilling effect.

When markets experience a significant decline, many investors view it as an opportunity rather than a reason to panic. The idea of buying "stocks on sale" is a common reaction, which often helps stabilize prices.

Historical data supports this optimism. Over the past three decades, the US stock market has finished the year higher about 78% of the time. Since 2001, the FTSE 100 has seen positive returns in approximately 71% of the years. Millions of individuals investing regularly for retirement create a steady flow of money that lifts prices, regardless of short-term fluctuations.

The financial media also contribute to this positive sentiment.

Analysts' compensation often depends less on the accuracy of their forecasts and more on maintaining good relationships with large clients. For example, when examining a major stock like Amazon, it's common to see 46 out of 47 analysts rating it as a buy, with an average 12-month price target 31% higher than its current price. Such widespread optimism can be hard to resist, fueling a self-fulfilling cycle of buying that drives prices higher, even when actual results may not meet the lofty expectations that sparked the surge.

The system thrives on continued belief.

Optimism, bolstered by habit, marketing, and sometimes flashy promotional materials, has propelled markets upward for decades. Economist John Maynard Keynes referred to this phenomenon as "animal spirits" — a collective belief that can defy logic and move the entire herd forward, leaving any lone skeptic behind.

People want to invest. They are encouraged to invest. Many are automatically enrolled in investment plans without even realizing it through workplace pensions. They are also incentivized to invest through tax breaks.

 It's reminiscent of a Ponzi scheme, although it's important to stress the "almost."

Economic growth resulting in rising profits

Over the long term, stock prices reflect the growth of real businesses. Economies have steadily expanded for centuries, driven by an increasing population, advancements in technology, and rising productivity. When the economy grows, companies typically sell more, earn more, and return more to their shareholders.

Since the early 1900s, company profits have been the primary driver of stock returns. Dividends and reinvested earnings create wealth more reliably than speculation or hot tips. As the global economy has expanded, so too have the portions that shareholders

enjoy.

Some skeptics argue that growth cannot continue indefinitely. They suggest that innovation may slow down, and that the low-hanging fruits of past revolutions—such as electricity, the internet, and smartphones—are harder to replicate.

However, new technologies like artificial intelligence emerge unexpectedly, disproving the claims of those who assert that the global economy

is merely stagnating.

Furthermore, governments have consistently worked to maintain economic growth through policies on migration, industrial investment, and targeted tax breaks. This exemplifies how powerful forces operate behind the scenes to bolster the stock market.

Despite these efforts to sustain a bullish market, there will always be periodic returns of bearish sentiments.

While markets tend to

rise over time, the process resembles a yo-yo riding an escalator rather than a helium balloon soaring into the clouds. Optimism has its limits; economic growth can stagnate for years, and central bank interventions do not always produce the desired effects. Investing in stocks is not a guaranteed path to easy wealth, and it carries significant risks.

Why it's not so simple

The long-term rise of stock markets may seem inevitable, but before becoming too comfortable, it's important to consider some real examples where investors experienced decades of disappointment.

The chart below illustrates the performance of the Nikkei 225, Japan's primary stock market index, from 1982 to 2012.

Nikkei 225 performance over 30 years. Source: Macrotrends.

Over the course of three decades, Japan's stock market ended up almost exactly where it started. This occurred despite the Bank of Japan's extensive efforts, which included injecting trillions of yen into the economy and later becoming one of the largest buyers of Japanese stocks through exchange-traded funds (ETFs).

Warren Buffett famously said, "Time in the market beats timing the market," but an investor in the Nikkei 225 during that period would likely disagree.

Significant challenges faced

Even though markets tend to rise over time, their movements are rarely smooth. There are numerous instances where market journeys have faced severe downturns and prolonged periods of stagnation.

Both the US and the UK have experienced their own dry spells.

The Great Depression serves as a stark reminder of this. After the stock market crash in 1929, US stocks plummeted by nearly 90% from their peak. It took until 1954 for the Dow Jones Industrial Average to recover to its previous level, resulting in 25 years without any net gains for those who invested at the wrong time. An entire generation saw their trust in the market go unrewarded.

Similarly, after the dot-com bust in 2000, the Nasdaq lost about 80% of its value and did not fully recover for approximately 15 to 17 years. The broader S&P 500 index also experienced much of the 2000s with little to no growth, enduring two major crashes in succession.

The FTSE 100 index peaked at 6,930 at the end of 1999. By the end of 2019, it had only increased to about 7,542. A £1,000 investment made at the peak grew to just £1,088 over two decades. This represents a gain of only 8.8% before accounting for fees or inflation. In real terms, investors actually lost purchasing power.

There are many other extreme examples of markets and economies struggling for extended periods, such as those seen in Greece and Zimbabwe, among others.

Human Factors

The average investor's experience often does not match the upward trajectory of the market. This discrepancy is due not only to inflation and investment fees but also to human behavior.

Timing mistakes can be costly. The market's long-term return relies on remaining invested through both crashes and rallies.

 In reality, many investors do the opposite; they tend to buy when the market feels safe and prices are high, and sell when fear is prevalent and prices are low.

Panic selling during a crash locks in losses, and missing out on the subsequent recovery can be even more detrimental. Studies show that the average investor's actual returns lag behind the market due to poor timing decisions and a tendency to chase the latest success stories too late. The market's overall upward trend benefits investors only if they can avoid making mistakes along the way.

Additionally, other human factors come into play. Market bubbles and fads have always existed; sometimes, prices rise not because companies are doing well, but because investors hope to sell at an even higher price to someone who is overly optimistic.

Moreover, human decision-making affects government policy. Sometimes, these decisions can be erratic and have negative consequences for the markets — not every action leads to upward movement; the relationship can work the other way as well.

What is the final decision?

Overall, we cannot conclude that the market is “designed” to grow.

No set of rules guarantees that everything will increase in value, and no single factor (or even a combination of factors) can ensure success or provide long-term returns.

While it's easy to reference a record of over 100 years of market performance, most of us don't have that long to invest. Our individual investment timelines are much shorter, and even with a century to work with, there are no guarantees of returns.

However, various inherent features of modern economies and equity markets create a tendency for growth over long periods. While these tendencies do not ensure positive results, they can make them more likely.

For instance, inflation can help drive markets upward, and government policies that promote growth and offer tax incentives can encourage further investment. Many other factors can also influence the markets positively. But is the system intentionally structured this way? That's for you to decide.