25 years ago: January 1994

S&P 500: 481.61 (vs. 2635.96 in 01/2019) 10-year U.S. Government Bond Yield: 5.7% (vs. 2.75% in 01/2019) Gold: $377.90 (vs. $1290.70 in 01/2019) GBP/USD: 1.505 (vs. 1.2984 in 01/2019) US GDP: 7,013 billion (vs. 20,658 billion in 01/2019) US Population: 260 million (vs. 328 million in 01/2019) 01/06/1994: Nancy Kerrigan is clubbed on the knee at the U.S. Figure Skating ChampionshipsinDetroit, Michigan. 01/17/1994: Los Angeles is hit by a major earthquake that cripples vital highways. 01/24/1994: The Yugoslav Noviy (Super in 01/2019) Dinar replaced the 1994 Dinar with 1 Noviy Dinar equal to 12,000,000 1994 Dinars. Market Tops: Hong Kong, Singapore, Thailand, Switzerland, Spain Israel, Philippines, Turkey, Mexico  

50 years ago: January 1969

S&P 500: 42.54 (vs. 2635.96 in 01/2019) 10-year U.S. Government Bond Yield: 6.19% (vs. 2.75% in 01/2019) Gold: $103.01 (vs. $1290.70 in 01/2019) GBP/USD: 2.39 (vs. 1.2984 in 01/2019) US GDP: 968 billion (vs. 20,658 billion in 01/2019) US Population: 205 million (vs. 328 million in 01/2019) 01/02/1969: New York Stock Exchange initiated 4-hour trading sessions (10 A.M.-2 P.M. in 01/2019), cut out Wednesday closings in force since June 12, 1968. 01/12/1969: The New York Jets of the American Football League defeat the Baltimore Colts of the National Football League to win Super Bowl III in what is considered to be one of the greatest upsets in sports history. 01/20/1969: Richard Nixon inaugurated as President of the United States. Market Tops: Korea, Great Britain  

100 years ago: January 1919

S&P 500: 7.788 (vs. 2635.96 in 01/2019) 10-year U.S. Government Bond Yield: 4.63% (vs. 2.75% in 01/2019) Gold: $20.67 (vs. $1290.70 in 01/2019) GBP/USD: 4.75 (vs. 1.2984 in 01/2019) US GDP: 84 billion (vs. 20,658 billion in 01/2019) US Population: 104 million (vs. 328 million in 01/2019) 01/06/1919: Theodore Roosevelt dies. 01/16/1919: Eighteenth Amendment to the Constitution prohibiting liquor is approved 01/25/1919: The League of Nations is founded.  

200 years ago: January 1819

GFD US 100/S&P 500: 1.645 (vs. 2635.96 in 01/2019) 10-year U.S. Government Bond Yield: 4.67% (vs. 2.75% in 01/2019) Gold: $19.39 (vs. $1290.70 in 01/2019) GBP/USD: 4.34 (vs. 1.2984 in 01/2019) US GDP: 726.677 million (vs. 20,658 billion in 01/2019) US Population: 9.379 million (vs. 328 million in 01/2019) 01/1819: Chile, Buenos Ayres, and Colombia, de facto independent. The Six Acts sanctioned by the British legislature. Spain cedes the Floridas to the United States. New south Shetland discovered. Alabama admitted to the Union. Arkansas erected into a territory. Stamford Raffles arrives in Singapore with William Farquhar to establish a trading post for the British East India Company.  

300 years ago: January 1719

UK Government Bond Yield: 4.098% (vs. 1.34% in 01/2019) UK GDP: £80 million (vs. £535 billion in 01/2019) UK Population: 6 million (vs. 66 million in 01/2019) 01/23/1719: The Principality of Liechtenstein is created within the Holy Roman Empire. 01/03/1719: Compagnie des Indes shares hit 320 Francs and will rise to 10,000 Francs on November 21, 1719 during the Mississippi Bubble. © 2019 Global Financial Data. Please feel free to redistribute this Events-in-Time Chronology and credit Global Financial Data as the source.

Most global markets are in a bear market.  The main question everyone is asking is whether the bear market will continue in 2019 and hit new lows, or whether the stock market will find a bottom and start to move up again.  Last year, we were optimistic that markets were in a bull market, but our hopes were quickly dashed.  Many European markets hit market tops at the end of January, and the rest of the world slid into a bear market after Labor Day.  It was hoped that the September-October decline would turn around at the end of the year, but December was the worst December in the United States since 1931 as the United States slid into a bear market. The United States and the MSCI World Index had avoided a bear market in 2016 when the rest of the developed world faced 20% declines, but this time, the United States was not so lucky.  The MSCI World Index  and the EAFE Index, illustrated in Figure 1, topped out on January 26, and the S&P 500 topped out on September 21.  As the graph illustrates, the EAFE Index is at the same level it reached in 1999. The main question is how long will this bear market last?  The bear market in 2000 lasted almost three years while the 2007-2008 bear market lasted a little over a year.  We have been in the current bear market for almost a year.  Is worse to come in 2019?   The 2000-2002 bear market was actually a combination of three successive bear markets that followed each other, worsening the decline with each new event.  First, the internet bubble burst in 2000, then in 2001, the 9/11 terrorist attacks further devastated the market, and in 2002, the collapse of Enron and other companies led to the passage of the Sarbanes-Oxley Act which tried to redress problems with corporate filings.  Although the 2008 decline was driven primarily by the unwinding of the real estate bubble that had built up in the United States and other countries, it took the collapse of several banks and investment companies, such as Washington Mutual, Lehman Brothers and Merrill Lynch to spur the government into action, passing the TARP to prevent the rot from spreading further through the financial system.  

GFD’s Alternative Indices

To analyze the current bear market, we would like to use two of GFD’s Alternative Indices that are provided exclusively by GFD to its customers.  The first compares the number of market tops and market bottoms each year while the second looks at changes in the number of shares outstanding. In both cases, we have 100 years of data to analyze these indicators over several market cycles. Global Financial Data covers 100 stock markets to determine which ones have hit a market top and which ones have hit a market bottom in the past.  GFD defines a bear market as a 20% decline in the primary market index for each country and a bull market as a 50% increase in the primary market index.  A market top occurs when the index declines by 20% or more after a 50% increase, and a market bottom occurs when the market rises by 50% after a 20% decline.  Bear markets occur more quickly than bull markets and over a shorter period of time with higher daily volatility, so their occurrence is quickly noted.  However, it may take a couple of years for a market to make the 50% recovery for a bull market to occur and it is only then that analysts realize when the market bottom occurred.  If the December lows have not been breached by this summer, then we will know that the current bear market is over with, but any penetration of the December lows over the next year sould signal a continuation of the current bear market. Although the United States stock market attained all-time highs in 2018, riding on the back of the tremendous growth in the FANG stocks, the MSCI EAFE index, MSCI Europe and MSCI Emerging Markets as well as China, France and other countries never exceeded their 2007 highs.  The bull market of the past eleven years has been mostly an American phenomenon.  66 markets hit tops in 2007 and 66 markets hit bottoms in 2009, but the recovery since then has varied dramatically from one country to another. Will the current bear market be like 2000-2003 when successive events drove the market further down, or like 2007-2008 when the market responded to a single event, the real estate collapse? There are many reasons to believe that the current bear market could continue in 2019.  Fears over rising interst rates, a trade war between China and the United States, Brexit, the rise of the “yellow jackets” in France, the rise of populist leaders in Italy, Mexico and Brazil and dozens of other events could easily tip global stock markets to new lows. On the positive side, emerging markets did not participate in the December decline that devastated American markets. The MSCI Emerging Market index failed to break its October 30 low in December. Moreover, a look at Figure 2, which nets market bottoms against market tops shows that the market has had three successive years in which market tops have exceeded market bottoms.  The last times this happened were in 1991-1993 and in 2001-2003. Of course, three years in a row doesn’t prevent the market from hitting a fourth year since the indicator hit four consecutive years of market tops exceeding market bottoms in 1965-1968 and five years in 1974-1978. Nevertheless, since this has only occurred twice in the past 100 years, the probability of a fourth year of market tops exceeding the number of market bottoms seems low.  A turnaround sometime in 2019 seems likely.   Let’s look at another of GFD’s exclusive alternative indicators.  The World Share Value Index is illustrated in Figure 3 below.  GFD calculates Share Value Indices for all the major markets in the world.  They take the market capitalization of each country and divide that by changes in the primary price index for each country.  The difference measures the growth in the number of shares outstanding over time.  As the graph below illustrates, there was little growth in the number of shares outstanding in the 1980s, but some growth in the 1990s and dramatic growth in the 2000s.  Each of these was followed by a 50% decline in the markets. A similar decline occurred after the growth in the number of shares outstanding between 1960 and 1973.  During the current market cycle, the indicator has barely changed.  There was virtually no growth in the number of shares outstanding throughout the world between 2008 and 2018.  This would tend to indicate that the decline in the market in 2018-2019 should be more modest than it was in 2000-2003 and 2007-2008.  

Conclusion

Of course, if we knew where the market was headed in 2019, we would be investing wisely and keeping this information to ourselves, but based upon the fact that the market top began a year ago in January, that the increase in the number of shares outstanding during the current market cycle has been small, and that Emerging Markets are already starting to bottom out, it seems likely that the market is more likely to hit new market bottoms in 2019 and then move into a new bull market, than enter a multi-year bear market as occurred in 2000-2003. We still feel that at some point in 2019, new attempts at breaking the December lows will occur, but once that occurs, stocks will begin a new bull market into 2020.  If you want to know if we are right, check back in a year.

Global Financial Data has added Share Value Indices for over 90 global markets with over a century of data for major countries.  Share value indices allow analysts to determine how the number of shares outstanding has changed over time in order that they can differentiate between changes in price as a source of changes in market capitalization and changes in the number of shares outstanding in market capitalization. Market capitalization is calculated by multiplying the price of shares by the number of shares outstanding.  The number of shares outstanding can increase as a result of a company raising capital by issuing new shares to the public, or by issuing new shares in order to take over a company that was previously private.  Companies that do an initial public offering and sell these shares to the public also increase the number of shares outstanding. The share value index would NOT change if there were a stock split or stock dividend since this would have no impact on the market capitalization of the company.  If one publicly traded company bought out another publicly traded company, no change in the share value index would occur since the shares would simply be transferred from one company to  the other. The share value index would decrease in value if a company went private, removing their shares from the public’s hands, if a company were nationalized by the government, or if the company purchased its outstanding shares, reducing the number of shares in the hand of the public. The share value index is calculated by taking the value of shares outstanding and dividing this by the value of that index.  If the stock market index and the market capitalization double in price, there would be no change in the Share Value Index.  

Share Value Index and Stock Market Index Changes in the 1980s and 1990s

A good example of how the Share Value Index can explain changes in the stock market is illustrated by the dramatic change in the global stock market in the 1980s.  The graph below measures global stock market capitalization as a share of GDP from 1900 to 2018. As Figure 1 illustrates, there was very little change in the ratio of global stock market capitalization to GDP between 1900 and 1980.  From 1980 to 2000, there was dramatic growth in the ratio, peaking in 1999. This was literally a once-in-a-century change in the stock market.  What caused it?  Was it because companies issued more shares to the public, or was it because of a dramatic increase in the price of stocks? Investors wanted to pay more for stocks in the 1980s and were willing to receive a higher proportion of their return in capital gains than in dividends.  The dramatic decrease in personal tax rates under the Reagan administration encouraged the shift from dividends to capital gains.  Figure 4 shows the world dividend yield between 1925 and 2018. The yield had averaged between 3% and 6% between 1925 and 1982 with 4.5% the average yield.  Between 1980 and 2000, the dividend yield moved down steadily and today it averages around 2%, about half of the level between 1925 and 1980. It should be remembered that since 1981, yields on government bonds have dropped throughout the world.  During the past few months, markets have edged into a bear market as interest rates on U.S. Government bonds pushed above 3%, levels that would have led to a bull market 20 years ago. So what changed investors’ perceptions of risk and their valuation models of the market? The 1980s and 1990s saw the world move from the closed financial markets that had prevailed in the world between the Great Reversal of 1914 and the 1970s and into a Globalized world that had prevailed before World War I undid the globalization of the 1800s.  If you combine this with lower yields on government bonds, the privatization of nationalized corporations, the growth in stock markets in former Communist countries, lower interest rates and lower tax rates, you have a once-in-a-lifetime shift in global financial markets. It may be fears of a second Great Reversal, in which governments reject globalization in favor of global competition through political intervention that has driven markets down during the past few months.  Unfortunately, if this is the case, a drop back to the levels of 2000 and 2008 remains a possibility. Let us hope that global leaders can see the folly of their actions and reverse course before it is too late.

  Global Financial Data has the most extensive database on historical stocks available anywhere in the world.  GFD has collected data on stocks that listed on the London Stock Exchange from the 1600s until 2018.  London was the financial center of the world until World War I, and many companies in emerging markets listed their shares on the London Stock Exchange before a stock exchange even existed in their country. After World War I, many foreign companies listed on the New York Stock Exchange.  Using data from London and New York, we can calculate stock market indices for emerging markets during the 1800s and 1900s before stocks listed on local exchanges and local emerging market indices were calculated. This is one in a series of articles about those countries. Havana did have a stock exchange before Castro overthrew the Batista government and nationalized all Cuban corporations without compensation. Today, of course, there is no stock market in Havana, although the building that housed the Havana Stock Exchange until 1959 still exists in downtown Havana and is pictured above.  I remember admiring the building when I walked by it on my visit to Cuba in 2016, but unfortunately, the stock exchange itself no longer exists.  Given the fact that no public corporations have existed in Cuba for almost 60 years, is it possible to recreate an index of Cuban stocks based upon shares that traded in London and New York?  The answer is yes.  

Cuban Capitalism Before the Revolution

Global Financial Data has information on 7 Cuban companies that traded in London before 1932 and 20 companies that traded in New York between 1905 and 1961. Before 1870, two Cuban mining companies listed in London, El Compañia Consolidada de Minas del Cobre (The Cobre Mining Co.) (1838-1867) and the Santiago de Cuba Mine (1849-1859).  The Cobre mine was located at the southern tip of Cuba near Guantanamo. It was the oldest mine in the new world, having been founded in 1544.  In the 1830s, a British entrepreneur bought the abandoned mine and brought Cornish miners and mechanics to get copper from the mine. The Cobre was a successful company for almost 30 years with a capitalization of about $5,000,000 in 1864. At its height, the mine was producing 67,000 tons of copper per year, but operations were suspended in 1869 when the quality of the ore declined, and the mine went bankrupt in 1869 causing a complete loss of capital to investors. The next phase in Cuban capitalism was an attempt to provide transportation to the island by building railroads and warehouses so the sugar and other crops produced in Cuba could be exported to the rest of the world.  Cuba remained under the control of the Spanish until the Spanish-American war in 1898 in which America defeated Spain and exerted its influence over the island for the next 60 years. Among the Cuban companies that listed in London were the Cuba Submarine Telegraph Ltd. (1870-1928) and Western Railway of Havana (1895-1913).  After the Spanish-American war, a number of new companies were established in London, including the Cuban Central Railroad (1901-1918), and the United Railways of Havana and the Regla Warehouses (1906-1932).  The world’s railroads were funded through London, so it should be no surprise that London funded Cuba’s railroads as well. Most of the companies that listed in New York produced sugar or tobacco, or provided services to the population of Havana.  Of the 20 Cuban companies that listed in New York, eleven were sugar companies and two were tobacco companies (the Cuban Tobacco Co. and the Havana Tobacco Co.).  The remaining stocks included the Banco Nacional de Cuba, The Cuba Co., which ran both the Consolidated Railroads of Cuba and the Compañia Cuban which owned about 300,000 acres of land on which it raised sugar, and the Havana Electric Railway Light and Power Corp. which consolidated the Havana Electric Railway with the Compañia de Gas y Electricidad de Habana, which had a perpetual gas and electricity franchise in Havana.   Fulgencio Batista was elected President of Cuba in 1940 and became the dictator of Cuba after a coup in 1952.  He remained in power until 1959 when Fidel Castro and his rebels seized power in Cuba.  The government nationalized all corporations in Cuba without compensation and American investors lost their entire investment.  The United States government still demands compensation for the companies that were nationalized while Cuba demands compensation for the cost of the embargo the United States has imposed on Cuba.  Neither side seems willing to compromise.  

Returns to Cuban Stocks

What differentiates the return on Cuban stocks from shares in other countries is the three strikes that have been thrown at investors during its history.  The Cobre Mining Co. was abandoned in 1869 causing a complete loss to investors.  A second collapse in Cuban share prices occurred in the 1920s when the decline in the price of sugar and in the Cuban economy caused Cuban stocks to lose over 90% of their value. The third loss occurred when Fidel Castro overthrew the Batista government and nationalized Cuban corporations generating a complete loss to shareholders. Up until nationalization, Cuban stocks had provided modest returns.  $1 invested in Cuban stocks in 1870 would have yielded $0.50 by 1961, an annual loss of 0.75%, but with reinvested dividends, the $1 invested in Cuban stocks in 1870 would have returned $48.75 providing an annual return of 4.36% over the 91-year period and an annual dividend yield of 5.15%.  Without reinvesting dividends, shareholders would have had no return to speak of.  Nevertheless, when the government nationalized all the corporations in Cuba, investors lost everything. It should be remembered that Cuba never had a growth industry.  Its main sector was agriculture, primarily sugar and tobacco, and other companies provided the infrastructure to ship Cuban goods abroad.  Tourism from the United States played an important role in the economy until 1959, but it was hardly a growth industry.  During the 2000s, Cuba’s revenues from tourism remained constant at about $2.5 billion.  Cuba’s exports are about $1 billion per year, but imports are over $5 billion. So was Cuba a good investment?  No. Cuban investors lost their money three times in the past. Cuba remains opposed to almost any expansion in the private sector.  Citizens are restricted almost exclusively to running a small restaurant, a bed and breakfast or driving at taxi. When you look at the three times that investors lost virtually every penny they invested in Cuba in the 1860s, 1930s and 1960s, one can almost be grateful to Castro for keeping investors out of Cuba so they wouldn’t get wiped out a fourth time.