Despite the recent 36% rally in US stocks (41% for the world)*, many people are probably still feeling bruised by the market. After falling so far in 2008 into 2009, most find it hard to imagine how stocks will recover any time soon. Bear markets always make investors feel recovery is impossible. Like what's just passed is somehow unique. Like capitalism is broken and markets will never recover—or if they do recover, it'll take forever.
Such feelings are common during and after bear market bottoms. Fortunately for us, capitalism's driving forces are extremely flexible and resilient. Despite financial panics, regulatory overhauls, flu epidemics, wars, social upheaval (civil rights and transition of agricultural to manufacturing and then service-based society), presidential assassinations, natural disasters, monetary and fiscal policy mistakes, protectionism, hyperinflation, bubbles (credit, housing, stocks, etc.), fraud, and a host of other problems along the way, capitalism continues to function. It continues to provide an incentive for individuals to work hard, develop new technologies and innovations, increase productivity, and raise our standards of living. It's impossible to predict exactly what the next innovation will be—imagine sitting in your Dodge Avenger in 1978 listening to an 8-track tape and trying to predict the invention of the internet. However, if you believe in capitalism, then you believe innovations will continue, productivity and standards of living will rise because of them, and stocks will continue to give you a higher probability of being wealthier than bonds or cash over time.
The longer the time period, the higher the probability stocks will outperform, and typically by a wider margin. Therefore the longer your time horizon, the more probable it is you'll be better off invested in stocks most of the time. This is no guarantee—it's simply the rational evaluation of probability, and the same reason millions of people get behind the wheel of their car every day despite thousands of daily car crashes, many deadly.
The future is full of uncertainty. If aliens land and declare war tomorrow, all bets are off. So the best you can do is invest based on what's most probable. Investing is a probabilities game, not a certainties game. Or rather, you could play a certainties game, but you probably wouldn't be happy with your long-term returns (think cash).
No one knows where the stock market is headed tomorrow, next month, or even next year. But history and a belief in capitalism tell us the most probable event following a bear market is a bull market. Capitalism didn't break. Bear markets are part of the economic cycle—always have been, always will be. A bull market's coming. Enjoy the ride.
*Total return from 3/9/2009 through 6/16/2009 for S&P 500 and MSCI World.