How High Could The Stock Market Go?

The threat of COVID-19 crashed the stock market in a historic way in February and March 2020. As bad as the market crash was, it quickly recovered and even reached historic highs by the end of the year.

As more investors seek financial security through turbulent times, some wonder – how high could the stock market go?

We’ll need to go back in history to answer that question. Our best market indicators through time are the Dow Jones Industrial Average and S&P 500. The average stock market return since the inception of these indices was approximately 10 percent.

This number is useful to determine long-term gains, but the S&P 500 gained over 18 percent in 2020. On the other hand, the Dow only gained 9 percent. Those gains are due to only a small percentage companies dominating the indices while the rest of the economy struggled.

Questions remain around economic recovery. Many analysts wonder if antitrust rumors swirling around big tech companies could stifle future growth potential. And there’s no telling if so-called recovery stocks will bounce back enough to make up for these losses.

On top of that, some popular stocks could lose value when the economy recovers if they don’t prove their long-term value. Even if they do, market perception could cause devaluation.

So, how long could this bull market last?

After 1929 Crash, How Big Was The Rally?

The biggest difference between the 1929 and 2020 crashes is how long they lasted. Black Monday’s crash was just the start of a multi-year bear market that lasted 846 days. This means that in spite of short-term gains, the overall trend from 1929-1932 was a major decline.

There were several “crash bounce” periods in the early stages and throughout. But none of them ever converted into a full economic rebound. In fact, it took until 1938 that the stock market grew again, but high unemployment rates remained through 1940.

In fact, the American stock market was still working its way to recovery until the Japanese bombed Pearl Harbor, launching the U.S. into World War 2.

Soon, the Dow experienced a four-year bull market raising it by 130 percent. This rally briefly ended when the Federal Reserve raised interest rates, but the post-war rally soon carried the stock market even higher.

Of course, that only helped a small number of people, as only about 4.2 percent of the U.S. population owned any stock. By 1954 – 25 years after the initial crash – the DJIA finally climbed back to 1929’s pre-crash highs.

The market then was less sophisticated and lacked the mutual funds and ETFs we have today, let alone on-demand trading services like Robinhood offering fractional trading and exposure to cryptocurrencies.

Here’s a closer look at a more modern market crash.

How Much Did Stock Market Rally Post 2009 Low?

In 2009, the stock market hit the bottom of what’s known as the Great Recession. This market crash was caused by excessive debt and speculative trading of mortgage-backed securities soured by predatory lending. Banks and car manufacturers tumbled, and the government stepped in with a federal bailout.

It was a two-year process that started in October 2007 and took about 50 percent off of the S&P 500’s value by the low. This kicked off a global financial crisis that sent shockwaves across the world.

Since that time, the market delivered a 17.8 percent annualized total return over the past decade. This also mirrors the recovery of the market following the 1987 crash.

The effects of this market crash were still being felt and discussed in March 2019, a year before the market nosedived again. In fact, it marked the longest bull market in history at 10 year, ending March 2020.

The total return in that 134-month period was 401 percent. However, the most recent market correction was brief, and investors piled in to kick off the next bull market. This can be attributed to the government stimulus package keeping liquidity in the economy.

In 2020 alone, the market gained 16 percent in the face of massive job losses and business closures. It started a K-shaped recovery, in which the market heads up while the economy heads down. This has some analysts wondering what effect the Federal Reserve is having on share prices.

Does Federal Reserve Money Printing Affect Market?

The Federal Reserve acts as a central bank for the United States. It buys bonds issued by the Treasury in a process better known as money printing; it creates money using more than just a physical printer. It introduces new money into the economy through quantitative easing.

It buys and sells Treasury bills to inject or absorb money. It can also set interest rates and basically create an elastic money supply.

This does have an effect the stock market. When the Fed creates money, banks lend more money, and that causes more money to be spent and invested. It’s estimated that every $1 billion in reserves turns into $10 billion in new credit money in the economy.

In fact, the biggest bull markets in American history were typically caused by quantitative easing. Often the Fed purchases securities as part of the QE process. In 2009, for example, it bought Fannie Mae and Freddie Mac, while also taking over IndyMac bank.

Analysts debate whether this is good or bad for the economy. Some believe it artificially inflates the market. This is intuitively a realistic scenario. After all, when the Fed buys bonds, the bondholder sells them and must allocate capital elsewhere, likely to risk assets aka the stock market.

How High Could The Stock Market Go? Conclusion

The stock market crash of 2020 was historic in its scope. But it ended rather quickly and converted to a bull market that led to historic gains. Just how high this market can go is debatable, but the sky is theoretically the limit.

Many analysts expect the economy will continue rising in 2021. Still, it’s likely to be less growth than experienced in 2020. And there’s no telling how long this bull run will last. But if history is anything to go by the bull markets are lasting longer thanks to monetary and fiscal stimulus and the returns are exceeding even the most optimistic analyst expectations.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.