At times, we get comments from clients saying something along the lines of… “the stock market is just a big bubble because it only has been around for 100 years… once the economy stops growing, we are in trouble and the bubble could easily burst.” While we disagree with their conclusion, we understand how one could form this opinion. Most published financial data only goes back 100 years. There is not much written literature for public markets (stocks and bonds) prior to the 1920’s. Because of this and the fact that my wife (Emily) does not allow this type of conversation at the dinner table, we found it helpful to pull together some historical data on the U.S. financial markets prior to the Great Depression.
The Formation of the U.S. Stock Market
The first organized trading in U.S. stocks dates back to 1792. At this point, the trading of stocks was more of a concept but the foundation was laid. The Buttonwood Agreement eventually evolved 25 years later in the New York Stock Exchange (NYSE). In 1830, the first railroad stock was listed in New York and within two years the exchange became predominantly a market for railroad and banks stocks. By the end of 1838, over 300 stocks were trading in the United States. The NYSE grew rapidly as companies rushed to have their name listed.
The Growth of the U.S. Stock Market
From the 1880s to the late 1920s, demand for stock ownership was on the rise because the U.S. economy (and the stock market) were experiencing rapid growth. For example, in the early 20th century the stock market was large relative to the size of the U.S. economy, with a stock market capitalization to GDP ratio of 174%, about similar levels as observed in 2015. The total number of shares traded in the stock market were 11x greater in 1930 when compared to the number of shares traded in 1885!
Technology That Helped Drive Growth
There were a handful of technological innovations that allowed the stock market to continue to keep growing, such as the telegraph (1844), the transatlantic cable (1866), the introduction of the ticker tape (1867), and the availability of local telephone lines (1878). These innovations gave more investors the ability to buy/sell stocks. With the introduction of the transatlantic cable and ticker tape, price quotations were quite instantly known from coast to coast and also in Europe.
The Prevalence of Information
In the second half of the 19th century, investors had a lot more information than they did 50 years prior. Because of this, the industry of financial analysts/research was born. This is also when investment advice was developed and utilized for the first time in the U.S. Broad market indices were introduced around 1885 when Charles Dow began publishing a daily index of some of the largest stocks in the Commercial and Financial Chronicle (soon to be Wall Street Journal). Yes, you guessed it… this was the genesis of the famous Dow Jones Industrial Average (DJIA).
A Transition From the Rich to the Middle Class
In the 19th century, market participants were mainly wealthy individuals. However, stock ownership expanded rapidly around 1900 from the rich to the middle class. It is estimated that the number of stockholders grew from 4.4 million in 1900 to 18 million by 1928. This tremendous growth was driven by entrepreneurs unloading their stock for sale to the public. There were also financial education campaigns teaching the less wealthy to save and invest and a lot of emphasis was put on historical returns.
The Roaring 20s and the Great Depression
There are quite a few reasons that our nation experienced a Great Depression. While not comprehensive, these factors were important contributing factors. First, the Roaring 20s was a time of excess. The middle class was able to afford luxuries (cars, washing machines, etc.) for the first time in American history. Second, the middle class began to use margin (borrowing against your stock portfolio) to buy more stock or to stimulate the economy (buy household goods). Many Americans were borrowing with 1:3 ratios. This means that they were able to borrow $3 dollars for every $1 they invested. This also means that a 33% reduction in value would wipe them out. Third, the consumer price index (CPI) was first developed in 1919, to track to the big inflation of the previous several years. The general public realized around 1920 that the prices of ordinary things available in 1913 had more than doubled. The middle class also quickly invested in stocks with the hopes of maintaining purchasing power to counter future inflation.
Conclusion
There are a handful of takeaways as we look to continue investing almost a century after the start of the Great Depression. Here are just a few:
- The U.S. stock market has a lot more than 100 years worth of history.
- Owning high-quality dividend paying stocks able to withstand the test of time continues to be the foundation of our investment advice at The Price Group. We think dividend stocks are especially relevant in this current environment.
- Time moves on but things do not really change. In 2023, it is still important to avoid investing in companies that have no earnings or lofty valuations.
- We should be thankful to live in America.
About the Author
Matt Price serves as a Partner and Director for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their three children and "Fisher" the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 11 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes everyone needs a wealth coach!
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The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
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