I’ve been taking time off work and during the break I’ve been trying to understand money and investing a bit more deeply, beyond the usual “buy stocks, buy index funds” talking points.
Something I keep coming back to is the way interest rates and markets interact. We’re living in a time where interest rates are generally quite low (with some spikes here and there recently), and inflation is mostly kept under control. But if you look back a few decades, high interest rates (double digits) weren’t unusual at all.
It made me wonder: are low rates simply the new normal because of how modern economies are structured? Or is this just another phase in a longer cycle?
And when interest rates stay low, the money tends to flow into equities and indexes like the S&P 500. Over long stretches, the S&P has massively outperformed other investment avenues from GIC/Precious Metals/Bank Savings, depending on the timeframe you choose. I’m trying to understand if that’s purely because of real economic growth and innovation, or if low rates artificially push valuations up.
I’m definitely not saying the S&P is a Ponzi (it clearly represents real companies), but the way it keeps going up almost nonstop made me wonder if there’s a point where the growth stalls, like for ex, what happened to Japan’s Nikkei after its massive boom.
So my question is basically:
Is the long-term rise of the S&P 500 mostly driven by productivity and innovation, or by monetary policy and liquidity? And if the latter, what happens when liquidity can’t expand forever? Could we ever see a long sideways/down market like Japan, or are the situations too different to compare?
I’m just trying to understand how money actually works in the big picture, so any explanation or reading material would be appreciated.