[NOTE: There will be no newsletter on Sunday, April 3. TKer will be on vacation.]

Peter Lynch, the    legendary stock picker  who ran Fidelity& rsquo s    market-beating  Magellan Fund for 13 years, made a prescient observation in a    speech he gave to the National Press Club  back in October 7, 1994.

It comes from the 38-minute mark of    this video  (via    @DividendGrowth):

Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. & hellip Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years. So I think & mdash the market is about 3,800 today, or 3,700 & mdash I' m pretty convinced the next 3,800 points will be up it won' t be down. The next 500 points, the next 600 points & mdash I don& rsquo t know which way they& rsquo ll go. So, the market ought to double in the next eight or nine years. They& rsquo ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That' s all there is to it.

When he says & ldquo the market,& rdquo Lynch is referring the Dow Jones Industrial Average, which    closed at 3,797  on the day he gave the talk.

If you compound that by an 8% growth rate over 27.5 years, which would get you to present day, then you get 31,520.

The Dow closed Friday at 34,861, which is pretty darn close. For context, a 7% growth rate would& rsquo ve gotten you to 24,405 and a 9% rate would& rsquo ve gotten you to 40,613.

If you did this exercise with the S& P 500, which closed at 455 on the day of Lynch& rsquo s talk, then you& rsquo d get 3,778 assuming an 8% compound annual growth rate. The S& P closed Friday at 4,543. (A 9% rate would& rsquo ve gotten you to 4,867.)

According to    S& P Dow Jones Indices, S& P 500 earnings per share (EPS) were $30.11 for the 12 months ending Q3 1994, around the time Lynch gave that speech. If you compounded that by 8% over 27.5 years, you& rsquo d get $250. S& P Dow Jones Indices estimates EPS for the 12 months ending March 2022 was actually $211, which is close. (They estimate S& P EPS will be $246 in 2023.)

Lynch was not predicting the precise point of the market in March 2022. He was talking about how markets trend over longer-term periods while acknowledging short-term volatility. If you allow him some margin of error to account for unpredictable short-term swings, then you may be able to better appreciate how his thoughts speak to some fundamental market truths we often talk about here at TKer.

I think three elements of what Lynch said are critical for investors to understand.

1: & lsquo Some event will come out of left field and the market will go down or the market will go up. Volatility will occur.& lsquo

This relates to    TKer stock market truth No. 8: & ldquo The most destabilizing risks are the ones people aren& rsquo t talking about.& ldquo

Russia& rsquo s invasion of Ukraine  is a good example. For investors, a conflict between Russia and Ukraine    had not been a concern, so markets weren& rsquo t prepared for it. This would explain why stocks went into a deep correction amid the initial news and buildup.

With these types of unforeseen events,    prices will swing wildly as markets digest every positive and negative development  as the situation unfolds.

This stands in contrast to the    risks everyone has been talking about, like inflation and tighter monetary policy. These risks had    investors concerned for months  before those fears were confirmed, and the actual news eventually had a limited effect on market volatility.

2: & lsquo I& rsquo m pretty convinced the next 3,800 points will be up it won' t be down. The next 500 points, the next 600 points & mdash I don& rsquo t know which way they& rsquo ll go.& lsquo

Over time, the stock market& rsquo s biggest moves will be to the upside (which relates to    TKer stock market truth No. 4), and the long game is undefeated (which is    TKer stock market truth No. 1.) But you can certainly get smoked in the short term (TKer stock market truth No. 2).

As we discuss frequently here on TKer,    big sell-offs are actually pretty normal. The S& P 500 experiences an average max drawdown (i.e., the biggest intra-year sell-off) of 14% a year.

For what it& rsquo s worth, the current market correction has seen the S& P 500 fall 12% from its high of 2022, which is less bad than average.

Lynch& rsquo s comment speaks to the advantage of a long-term investment horizon, which is    a valuable edge most investors have.

Share

3: & lsquo Profits go up 8% a year, and stocks will follow. That' s all there is to it.& rsquo

The stock market has historically usually gone up because earnings have usually gone up. That& rsquo s because    earnings are the most important driver of stock prices, which is    TKer stock market truth No. 5.

Check out this chart of S& P 500 earnings since 1986, courtesy of    Yardeni Research. It& rsquo s on a logarithmic scale, which smooths out the curve you get when growth is compounding at a steady rate over time.

There& rsquo s some short term noise. But over time,    earnings have been going up  and to the right.

Jurrien Timmer, director of global macro at Fidelity Investments, recently    shared a chart  showing the tight relationship between earnings and stock prices.

Stock prices are on the y-axis, accompanied by earnings on the x-axis. The data goes back all the way to 1871. The r-squared of 0.9686 in this linear regression is very close to 1, which means earnings do an extremely good job of explaining how stock prices behave.

In other words, stocks go where profits go.

& ldquo That' s all there is to it,& rdquo Lynch said.

-