Then if you held from 1982 to 1987, the S&P 500 nearly tripled, despite low inflation and relatively few major technological changes. What was the difference? Interest rates went from 19% to 6%.
A useful lens with which to view this and other phenomena is "Which factors cancel out, and under what timeframes?" Technological development leads to large microeconomic winners and losers but little macroeconomic effect under short time frames, less than the business cycle, because the mechanism by which it increases overall welfare is to put workers out of work and firms into bankruptcy, freeing up those workers and that capital to be invested in new enterprises. Interest rates have a large effect over that timeframe, because they affect all firms in the economy equally. Over long time frames (multiple business cycles), the effect of interest rates washes out because they go up and then they go down and eventually they equilibrate near the long-term average. Technological development dominates then because you've given the economy a chance to adapt to new production methods and re-employ workers in obsolete jobs.
Zoom out to "Max" to get the full 60 year history. You can clearly see a full four decades of declining interest rates running from 1981-2020. That very neatly corresponds with the amazing stock market growth most HN readers, myself included, have grown up with.
The stock market growth is neatly correlated with declining interest rates, not with the actual value of the interest rates currently. That is, until the interest rates can't go any lower. The 10-year yield got as close as I hope it will ever get to zero back in 2020. There's nowhere to go but up from there.
For myself, I'm dusting off the old magic - a 60/40 stock/bond portfolio, with the stocks focused on value funds, plus a relatively small amount in "breakout" funds that could multiply a few times if technology goes the way I think it will. Maybe if interest fall a little bit I'll dial it to a 70/30 mix, but bonds are definitely part of the equation now.
On the other hand, I may be missing something. Ray Dalio's All Weather Portfolio is 55% bonds, and it's supposed to be safe-ish for any market conditions.
Yes, of course, but this frequently comes with significant productivity benefits. This is what I'm referring to when I say "creating for free". These marginal productivity improvements are going to be harder and harder to come by over time. Huge fan of Schumpeter, btw.
Of course, the creative destroyers in question would much rather focus on the "creation of value" narrative, because it avoids attracting attention (and competition or regulation) from the industries that they're about to destroy. So there are pretty significant information distortions in the popular narrative.
Interest rates and corporate taxes have the property that they affect the whole market, which makes them much more useful to the Fed. If you bought NVidia in 2022 or Apple in 1998, congrats, you made a good investing call. But if you bought the S&P 500 in 2009 and are congratulating yourself on your 600% returns over the decade, you should know that most of that is because of low interest rates, and if the low interest rate environment unwinds, so will your stock portfolio.