What Drives The Stock Market?

October 19, 2008 by Joe Ponzio

On Thursday, I referenced a second letter that we’ll be sending to clients, intending to send it out on Friday. Rather than rush it out, and because it scratches the surface of economics and business valuation, I decided to put it in front of some friends and family to see if it really made sense. Obviously, a deep discussion about economics would bore most people to sleep.

So, with the letter written and ready to go out in the next day or two, I’ll ask you the same question I asked my friends and family before I gave them the letter:

Why do you think the stock market will be higher ten years from now?

(Most common answer: That’s what it does – it goes up over time.)

As you consider this question, don’t look at Friday’s close or speculate about where the Dow will close in 2018. Instead, look at averages. The Dow averaged about 10,500 or 11,000 this year. Why should it be much higher than that ten years from now?

Obviously, I don’t have all the answers and I don’t know where the markets will close tomorrow or in 2018. All I can do is shamelessly steal from Warren Buffett’s past discussions on the subject. (And if you’ve read those, don’t spoil the answer for everyone else!)

Feel free to spark a discussion in the comments, or just give the question and your answer some serious thought. I won’t jump in to the discussion until after the letter goes out.

EDIT: Rene brought up some great points; but, I should have clarified this question. I’m assuming that it’s business as usual in the United States. I’m not talking about making fundamental shifts, though one could argue the necessity of those shifts. I’m asking: If it’s business as usual in the United States, why should the stock market be higher ten years from now?

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