“There is a tide in the affairs of men…”
PDF version: Share Prices
This chart was featured in an article on MarketWatch on November 6, 2016: here. Below are excerpts from a Q&A with journalist Sue Chang:
Q. What is the context of the chart? Which stock index or indices is it showing?
A. The index shown is one I constructed using several sub-indices and individual share prices. In summary, it covers Genoa (the Bank of St George) from 1509 to 1601, Holland (the Dutch East India Company) from 1602 to 1692, Great Britain (the East India Company, the Bank of England and the South Sea Company) from 1693 to 1788, and the United States (various indices of financial, transportation and industrial companies) from 1789 onwards. The index is constructed as an extension of the S&P 500, which began in its earliest form in 1923. The accompanying list of financial crises goes back somewhat further than the data on listed share prices, to include the histories of the banking houses of Northern Italy, notably the Medici bank in Florence. The sequence of Florence, Genoa, Holland, England and the U.S. broadly represents the shifts in the location of financial innovation and economic hegemony throughout the period, as outlined in, for example, historian Giovanni Arrighi’s book The Long Twentieth Century. The list of financial crises was partly inspired by Charles P. Kindleberger’s study Manias, Panics and Crashes.
Q. Given its upward trend, are you suggesting that investing in stocks pays off in the long term?
A. I don’t draw any statistical or economic conclusions from the chart. It is intended only as an illustration of financial history. I would highlight three technical reasons for caution: firstly, the index doesn’t include dividends, so it does not show the total return from owning stocks; secondly, it is not adjusted for inflation, so does not represent the real value of stocks relative to goods prices; and thirdly, like any long term index it has survivor bias, in other words it is given an upward bias as failing companies are replaced by successful ones in the index.
Q. Can you put the chart into current market context and what you expect to happen with the S&P 500?
A. I don’t have an opinion or a forecast on the current stock market, beyond the observation that over the past few years it has done a good job of proving the old dictum that bull markets climb a wall of worry. I would note that attempting to call major stock market tops has generally not been a fruitful activity for investors.
Q. What is the key point of the chart?
A. The key point of the chart, as mentioned above, is to be an illustration of financial history. It is a visualisation of the ebb and flow of market sentiment from a long term perspective, or what historian Fernand Braudel termed the Longue Durée. Much financial commentary is concerned with the very short term, and I believe it is useful and edifying to place market movements in a longer term context.