The Future of the Stock Market
Dr. Bryan Taylor, Chief Economist, Global Financial Data
Global Financial Data has put together over 400 years of history on global stock market capitalization and over 300 years of history on government debt to see what factors have affected their growth and decline. We have combined this with data on GDP to calculate stock market capitalization as a percentage of GDP over the past two centuries.
Figure 1 provides over 200 years of history on world stock market capitalization as a share of Global GDP. Some of the historical data are estimates, but they are based upon data collected on thousands of companies from dozens of stock exchanges around the world. The trend in this graph is clear. Stock market capitalization as a percentage of GDP has increased dramatically during the past 200 years and especially during the last 40 years. Surprisingly, world market cap as a share of GDP was constant for almost 100 years between 1880 and 1980, but it has increased dramatically since 1980.
Will this trend continue? Will global market cap stay above 100% of GDP during the rest of this decade? Or will the numbers return to the 40% level where it was at before 1980? And what about government debt? Will it continue to rise? What is its relationship with stock market capitalization?
Figure 1. World Stock Market Capitalization as a Share of Global GDP.
Analyzing Financial Markets by Era
GFD has broken up the past into historical periods based upon changes in the financial regimes that dominated financial markets to determine what factors influenced the growth and decline of financial markets in the past. These periods include the Napoleonic Wars (1792-1815), the Transportation Revolution (1815-1848), Free Trade (1848-1873), the Gold Standard (1873-1914), World Wars (1914-1945), Keynesianism (1945-1981) and Globalization (1981-2019). As the data below show, each of these points in time provided important turning points in both equity and debt markets.
For the reasons stated below, we fear that the period of Globalization may be over and a new era of greater Nationalism may have begun which could constrain the growth of financial markets during the next two decades. The global economy may soon see less international trade, higher interest rates and lower growth in market capitalization than occurred during the period of Globalization.
It should also be noted that the stock market has gone through 30-year cycles during the past 150 years with large increases in market capitalization in the 1890s, 1920s, 1950s, 1980s and 2010s. Growth often slowed in the two decades that followed. Will we have to wait until the 2040s until another surge in capitalization occurs? And what will happen in the meantime?
The Growth in the Stock Market Over the Past 425 Years
Before the 1800s, only a handful of companies traded on stock exchanges. Global stock market capitalization amounted to about 1% of global GDP in 1800, and markets mainly traded government bonds, currencies or commodities. The only countries where the stock market’s capitalization as a share of GDP was higher than 1% in 1815 were the United Kingdom and the United States. Figure 2 details the number of stock markets covered by Global Financial Data during the past 425 years.
Figure 2. Countries With Indices Covered in the GFDatabase
Between 1848 and 1873, railroads consolidated their hold on stock exchanges and other sectors such as finance, mining and industrials arose. Because the period between 1815 and 1914 was a time of relative peace, government bonds’ share of GDP shrank freeing up capital for the stock market. Stock market capitalization increased from around 4% of World GDP in 1848 to 17% in 1873.
The world switched to a Gold Standard in 1873 which remained in place until World War I. Market capitalization as a share of world GDP more than doubled from around 17% in 1873 to 37% in 1914, peaking at 43% in 1909. It should be noted that the stock market enjoyed one of its periods of greatest growth during the period of free trade and globalization that occurred before World War I.
Until 1860, the Bank of England was the largest company in the world by capitalization, but after 1870, the London & North-Western Railway was the most valuable company in the world, employing over 100,000 people. However, the number of countries covered only increased from 28 in 1873 to 35 in 1914 indicating that most of the growth in stock markets came from an expansion in the number of companies and industries within each country, not the introduction of stock markets in new countries. In 1900, the Standard Oil Co. became the largest company in the world by market capitalization. Consumer stocks began appearing, utilities grew in size and industrials represented a larger portion of the economy. By 1914, the market was not limited to finance and railroad stocks, but was truly diversified among different sectors.
The next two periods from 1914-1945 and 1945-1981 were periods of little growth in stock markets relative to GDP. After World War I, there was a desire to return to the world that existed before World War I began, but this failed. The Great Depression during the 1930s and war restrictions in the 1940s directed capital to governments and the war, not to the stock market. In 1945, world market capitalization as a share of GDP was smaller (32%) than it had been in 1914 (37%).
After the war, governments feared that the Great Depression would reoccur. Governments that had run the economy during the war thought they could be just as successful running the economy during the peace. Left-leaning governments nationalized many industries, and governments planned their economies imposing strict controls on the market. In eastern Europe, stock markets ceased to exist. The inflation of the 1970s further shrank the size of equity markets. By 1981, world stock market capitalization as a share of GDP had shrunk to 22%, less than it had been in 1880, one hundred years before. Imagine if in the year 2123, stock markets represented the same share of GDP as they did in 2023. Stock markets are built to grow, not shrink.
The failure of economic policy during the 1970s to promote growth and achieve low inflation led to a return to private markets. Nationalized firms were privatized. With the fall of communism, stock exchanges were opened up in former Communist countries, emerging markets raised capital by promoting exports and stock markets, and inflation was lowered from double-digit levels to the 2% that central banks were targeting. Global market cap as a share of GDP rose from 22% in 1981 to over 100% in 1999 and 135% by 2020. The number of markets covered increased from 38 in 1945 to 52 in 1981 and to over 100 by 2003.
Interest rates played a similar role during these periods. The largest number of government defaults happened during the Napoleonic Wars (1792-1815) and the World Wars (1914-1945). During times of peace, defaults on government bonds were less common. The Keynesian Era was a period of consistently rising interest rates while the periods of Globalization (1848-1914 and 1981-2019) were periods of declining interest rates. Lower interest rates leads to higher market capitalization, but it also makes it easier for the government to issue more debt.
Stock Market Capitalization and Debt in the United Kingdom During the Past 333 Years