Stocks for the long run? Well, yes and no...

Key Markets report for Friday, July 18, 2025

After a sharp correction from February through April this year, stock indices have rapidly recovered all losses and many of them are trading at new all time highs. Seemingly, the “stocks for the long run” investment hypothesis has been proven right once more. But price levels haven’t risen uniformly in all markets: the United States have been in the lead and by a fat margin, while British stocks have lagged very significantly:

Over the last 15 years counting from January 1, 2010, Britain’s FTSE 100 index added barely 65% while during the same interval, the S&P 500 rose 562%, with Japanese and German indices falling in between.

Stocks for the long run?

According to an analysis on stock investing published a few years ago by McKinsey, "since about 1800, stocks have consistently returned an average of 6.5 to 7.0 percent per year (after inflation). Our analysis shows that market returns in the past 25 years are within that historical range (exhibit)."

Well, yes and no. For one thing, the idea that stocks "consistently returned an average of 6.5 to 7 percent per year..." is based on the performance of major stock indices. The problem with that is that the indices are periodically reshuffled. Successful, growing companies are added to indices and the failing ones are excluded, so we have the "survivorship bias" baked into the analysis.

The second problem, which is a major risk for investors, is that the "long term" could turn out to be really long if we have a real bear market in the near future. We have not experienced a real bear market since at least 2009 and that one was relatively mild compared to what bear markets could be: when the stock bubble popped in 1929, the S&P 500 dropped 86% and it took 29 years to fully recover. When the Japanese 1980s bubble burst, the Nikkei fell 82% and it took more than 34 years to recover. Even today, the Nikkei is trading only about 800 points above its December 29, 1989 peak, which was 38,915.

The bubble will burst, only not just yet…

So, should investors be nervous about the current bubble bursting? Of course, this could happen any day, triggered by some event that we can’t predict. However, given that stock market levels are predominantly driven by one market force (the explanation is at link), which is central bank monetary expansion, we can expect that the bull markets will continue for another while before there’s a deluge.

But this doesn’t mean that investors should be complacent. The higher the stock markets rise, the more volatile they become and the more brutal the corrections that will happen along the way. Rather than attempting to trade around this volatility, which can be a very stressful (and costly) experience, investors should consider gradually diversifying their equity portfolio and seek exposure to commodity markets like metals, energy and agricultural products.

To learn more about TrendCompass reports please check our main TrendCompass web page. We encourage you to also have a read through our TrendCompass User Manual page. For U.S. investors: an investable, fully managed portfolio based on I-System TrendFollowing is available from our partner advisory (more about it here).

Today’s trading signals

With yesterday’s closing prices we have the following changes for the Key Markets portfolio: