Understanding the historical context of monetary markets is critical for investment professionals searching for to make informed decisions in today’s complex landscape. This examination of historical data stretching back greater than 230 years shows how markets have evolved and the way continuity and alter shape investment opportunities.
From the dominance of railroads within the nineteenth century to the emergence of cross-sector indices, this historical perspective provides invaluable insights for analysts working with older data. By integrating this data into modern strategies, professionals can higher manage market cycles, understand long-term trends and refine their investment approaches.
This post – Part II of a three-part series – is geared toward investment analysts who wish to work with older data and wish to know more in regards to the historical context. My first post dated and defined full modernity after which traced modernity’s roots to the Nineteen Twenties. This post pushes the story back even further. The audience, in turn, is the analyst who desires to work with this older data and desires to know more in regards to the historical context.
Continuity and alter
It will be demonstrated that only a number of elements of today’s financial markets have been constantly present for the reason that 1790s:
- Since then, the limited liability company has been available to US investors as a legal form with adequate liquidity for getting and selling. And a shareholder has all the time been a residual man, subordinate within the capital structure and last in line to receive a payout within the event of an organization liquidation.
- There has also been a market for presidency bonds for the reason that 1790s, sometimes only with sub-government issues (government bonds and municipal bonds).
In short, a return series for U.S. stocks and bonds will be constructed that goes back greater than 230 years. I even have to confess that despite a long time of effort, this data remains to be not nearly as good as the information after 1925. However, I imagine the record is nice enough for a lot of purposes.
To trace how the stock and bond markets of the 1790s evolved into their modern form, it’s again desirable to work backwards.
From the Civil War to the First World War
If you read enough historical evaluation on Wall Street, you may come across phrases like “Since 1871, stocks have…” or “That was the best.” [worst] Returns during the last 150 years.” Admittedly, these expressions are less common than “since 1926,” but you’ll find them.
What happened in 1871? Nothing. Like 1926, that is an arbitrary date determined by the needs and preferences of later data compilers, moderately than a real historical cut-off date.
The real place to begin of the early modern period was the top of the civil war. In addition to being a remarkable turning point in history, since 1865 now we have had the equivalent of the and a handbook with simultaneous publication of stock prices, share numbers, dividends and profits, in addition to details about bond prices, coupons, issue amounts, maturities and terms. This source, the , was created available online from the St. Louis branch of the Federal Reserve.
Statements anchored in 1871 typically use dates from Robert Shiller’s website. Shiller reproduces price, dividend and earnings data compiled by Alfred Cowles within the Thirties. Cowles had Data from 1917 already compiled by Standard Statistics, the predecessor of Standard & Poor’s. His unique contribution was to keep off the stock market record by five a long time.
What did Cowles find there when he began his data in 1871?
- The New York Stock Exchange had already achieved national dominance. Cowles felt he could safely ignore stock trading on regional exchanges or over-the-counter (then called “curbside” trading). He found 80% or more of the market capitalization on the NYSE – in regards to the same share of the whole U.S. market capitalization that the S&P 500 accounts for today.
- However, there was one key difference. A single sector dominated the NYSE of this era: railroads, which initially accounted for about 90% of the NYSE exchange and still accounted for nearly 75% in 1900.
- It wasn’t until the Eighties that gas and electric utilities first appeared in Cowles’ records, and it wasn’t until after 1890 that industrial stocks appeared – one reason why the Dow Jones Average doesn’t date until 1896.
For this reason, Cowles postponed his start date to 1871. His goal was to create a multi-sector index, as had grow to be possible for Standard Statistics from 1917. It wasn’t until 1871 that he was capable of raise a number of stocks, which he called “utilities,” which in his case included canals and “industrial operations,” meaning coal mines and shipping services.
Today’s analyst mustn’t be fooled: Essentially, the Shiller-Cowles stock index is a single sector index for railroads until after 1900, when sectors actually began to proliferate and approached modern levels of diversity through World War I.
Of course, there have been firms in various industries long before 1900, but these firms either had no traded stocks or weren’t traded on the NYSE.
In fact, banks and financial services firms had already stopped trading on the NYSE before the Civil War. This sector is consistently missing from the Cowles indices.
The final difference is the variety of stocks available: At the start there have been just below 50 stocks within the Cowles index. By 1899 there have been fewer than 100 holdings and it was not until the First World War that a count of 200 was reached.
Nevertheless, apart from numbers and sector concentration, the differences between the U.S. stock market within the 1870s and the market within the Nineteen Twenties aren’t significantly greater than the differences between the Nineteen Twenties and the Nineteen Seventies separate. There is a meaningful continuity.
With these caveats in mind, the analyst can append the Cowles-Shiller data to data after 1925 to create a monthly series of stock returns spanning 150 years. Price return will be distinguished from total return, dividend yields and price-earnings ratios will be calculated, returns are value-weighted, and Shiller provides an inflation measure to calculate real returns.
Bonds
It’s complicated.
You cannot create a 150-year continuous record of Treasury bond returns in parallel to what you may do for stocks. Or moderately, you may try this – there are treasuries that had trade balances throughout the period between the Civil War and World War I – however the portrayal will likely be mistaken in several ways and can likely be misinterpreted.
And you mustn’t trust any 150-year bond yield chart you come across unless the report incorporates quite a few footnotes.
This caution also applies to historical reports on the 60/40 mix and other balanced stock/bond mixes, reports that proliferated after 2022. The bond component of any balanced portfolio evaluation that extends beyond World War I is suspect.*
In fact, I can not find any description of the nineteenthTh US bond market of the century on this series of articles. I refer you to my current work: “We present a brand new monthly series of U.S. Treasury bond yields from 1793 to 2023“, which provides an summary of the history of the bond market from 1793 to 1925 and provides an in depth discussion of what form of government bond series could be constructed.
I’ll repeat and emphasize what did NOT exist within the bond market before World War I.
- There was no Treasury bill and no risk-free rate of interest. There are records of short-term securities dating back to around 1830, but they weren’t issued by the Treasury and are actually not an indicator of a risk-free instrument. Thus, in Jeremy Siegel’s historical notes, “bills” represent paper rates issued by “men’s and men’s furnishing stores, dealers in dry goods, hardware, shoes, groceries, floor coverings, etc., the manufacturers of cotton, silk, and woolen goods.” ” (Frederick Macaulay, pp. A340-341).
- There were only long government bonds with maturities of 20 to 30 years, with supply steadily shrinking after about 1877 as the federal government ran large surpluses.
- By 1900, there was not much liquidity within the Treasury market, and individual bonds were not even traded every month. Bonds were locked up within the Ministry of Finance to make sure the circulation of national banknotes. You can find an evidence in my article. It was only after the issuance of the Liberty bonds starting in 1917 that the trendy treasury market emerged: a deep, liquid marketplace for instruments guaranteed by the worldwide hegemon that would function an anchor for the fixed-income sector.
Finally, listed here are two more succinct claims in regards to the available pre-World War I bond data:
- Don’t accept Jeremy Siegel’s bond returns from 1871 to 1920.
- Do not use Robert Shiller’s GS-10 series during this era.
Both return series have the identical source: a return series compiled by Sidney Homer in his 1963 book. Little do Siegel or Shiller, and possibly Homer, know that the source for this series is amazingly problematic and even fictional, as my essay explains in additional detail.
Don’t go there.
The next and final post on this series looks at pre-Civil War U.S. markets.
Sources
- This is at FRASER [https://fraser.stlouisfed.org/title/commercial-financial-chronicle-1339?browse=1860s]. Free, online and searchable (inside OCR limitations).
- The Shiller data is included [http://www.econ.yale.edu/~shiller/data.htm]. The monthly values represent the typical of the 4 or five weeks of a month, which in turn limits volatility.
- Cowles’ book, describing his data collection and index creation efforts, is accessible online at [https://som.yale.edu/centers/international-center-for-finance/data/historical-financial-research-data/cowlesdata]
