In the long run, does the equity market always go up?

Several months ago, an economic adviser from a trading platform gave a lecture to a group of doctors on the benefits of equity investment. During his talk, he emphasized two key points:

Systematic Investment Plans (SIPs) in equities are the best form of investment.
As India develops, the equity markets will generally trend upward.

While these statements may seem reasonable, it is important to critically examine whether economic growth always translates into strong stock market returns.

Does economic growth always lead to strong stock market performance?

One of the most significant development stories of our time is China’s rapid economic growth. Between 2007 and 2020, China experienced unprecedented expansion, becoming the world’s second-largest economy and a global manufacturing powerhouse. However, what is often overlooked is how the stock market performed during this period.

For instance, if an investor had put ₹1,000 in the Hang Seng Index (HSI) in January 2007, that investment would have grown to just ₹1,156 by 2025. This reflects a Compounded Annual Growth Rate (CAGR) of only 0.78%—an underwhelming return given China’s economic rise.

Let’s also consider the impact of a monthly SIP of ₹1,000 in the HSI since 2007. Would dollar-cost averaging have helped improve returns, or would market stagnation over the years have still resulted in poor outcomes?

print(hsi)

         sip       date
       <num>     <Date>
  1:  -10000 0002-01-07
  2:  -10000 0001-02-07
  3:  -10000 0001-03-07
  4:  -10000 0002-04-07
  5:  -10000 0001-05-07
 ---                   
217:  -10000 0001-12-24
218:  -10000 0001-01-25
219:  -10000 0001-02-25
220:  -10000 0001-03-25
221: 2338091 0001-04-25

xirr=xirr(hsi$sip,hsi$date)
print(xirr)

[1] -0.06161213

Based on the XIRR calculation for a consistent SIP of ₹1,000 per month from 2007 to 2025, the return was -6%. This means that over 18 years, an investor would have not only failed to generate wealth but actually lost real capital!

England and Japan are other striking examples with similar stagnation in stock market over an extended period of time.

Key takeaway

The future cannot be predicted; instead, one should stay prepared for all possible outcomes.

This case study serves as a warning that stock markets do not always align with economic growth, and blind faith in equities can lead to disappointing results. A well-balanced investment strategy that considers valuation, market cycles, and risk management is essential for long-term success.

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