The Future of the Stock Market

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

Figure 3. United Kingdom Stock Market Capitalization and Government Debt as a Percentage of GDP

               Figure 3 compares the growth in stock market capitalization and government debt as a share of GDP in the United Kingdom from 1690 to 2022.  What is interesting is to see how the two values behaved relative to each other. In 1690, both stock market cap and the government debt were around 1% of GDP.  Both grew until around 1720 when the South Sea Bubble occurred.  Restrictions placed on firms’ ability to issue new equity and mistrust of the stock market caused market cap to decline for the rest of the century.  However, Britain was engaged in several wars, including the Seven-Years’ War (1756-1763), the American Revolution (1775-1783) and the French Revolution/Napoleonic Wars (1793-1815), which increased Britain’s government debt.  As a result, British debt rose to over 230% of GDP by 1820 while stock market capitalization stagnated and stayed around 20%.

               During the period from 1820 to 1914, Britain engaged in few major wars.  GDP grew while government debt declined.  The government debt to GDP ratio declined from 235% in 1822 to 27% in 1914.  Meanwhile, stock market capitalization rose from 14% in 1815 to 154% in 1910.  Stock market capitalization first exceeded government debt in 1871.

               Once World War I began, capital was redirected to government debt and the stock market was starved of capital.  By 1918, the stock market had dropped to 65% of GDP while government debt rose to 183% of GDP by 1923.  Government debt shot up again during World War II and by 1946, it had risen to 239% of GDP, even greater than it had been at the end of the Napoleonic Wars.  The stock market’s capitalization declined both during the war and after the war when the Labour government nationalized many of the main industries in Britain.  By 1949, stock market capitalization was only 49% of GDP, below where it had been in 1858.

               Although stock market capitalization recovered in the 1950s, it shrank during the inflation of the 1970s. When the stock market collapsed in 1974, capitalization shrank to 19% of GDP, less than it had been in 1711. Since then, however, the stock market has grown rapidly as inflation declined and different industries were privatized. Stock market capitalization peaked at 175% of GDP in 1999, then fell back to 93% in 2002. The ratio has stayed above 100% in most of the twenty-first century.  At the same time, the government debt/GDP ratio has consistently risen over time, increasing from 21% in 1991 to over 100% by 2020. 

               It is interesting to note that market cap/GDP and debt/GDP moved inversely to one another between 1720 and 1960.  During the 1970s and 1980s, stock market capitalization rose while government debt declined.  During the 1990s both rose, and during the twenty-first century, government debt has risen while stock market capitalization has remained constant.  Between 1720 and 1960, the government restricted money flowing to the stock market when the government needed to expand government debt.  When government debt declined, it freed up money to flow into the stock market.  That relationship is no longer true, and the pattern for the current century appears to be stock market capitalization stuck around 100% of GDP while government debt increases.

Stock Market Capitalization and Debt in the United States during the Past 225 Years

Figure 4 compares the growth in stock market capitalization and government debt in the United States between 1792 and 2022. Stock market capitalization and government debt show a similar pattern to what occurred in the United Kingdom. Until the 1980s, the two measures were inversely related, but since 1980, they have both increased, rising to over 100% of GDP. 

Until the 1980s, the increases in government debt were driven by wars: the Revolutionary War (1775-1783), the Civil War (1861-1865), World War I (1914-1918) and World War II (1941-1945).  During all other periods of time, except for the Great Depression, government debt declined.

The market cap/GDP ratio was stagnant during the first half of the 1800s since it was mainly banks and insurance companies which were traded on the stock exchanges.  During the last half of the 1800s, railroads were built to crisscross the continent.  Oil, consumer goods, mining and other industries rose as well, pushing the market cap/GDP ratio up from around 10% in 1850 to 60% by 1900.  As is the case in the United Kingdom, market cap/GDP remained constant for the next 80 years.  This was, in fact, a worldwide phenomenon.  When World War I began, government debt rose and stock market capitalization fell.  Government debt declined during the 1920s as market cap rose, and then declined in the 1930s and 1940s as government debt rose to fund the Great Depression and World War II.  Government debt steadily decreased from 1945 to 1981 before it began its inexorable rise.  Both stock market capitalization and government debt have steadily increased since 1981.

There is little evidence that the Debt/GDP ratio will reverse in the near future.  The government has no commitment to ending its dependence on budget deficits.  But what will happen to stock market capitalization?  Will it continue to rise as it has done over the past 40 years, or will it stabilize for the next 100 years as occurred during the 1900s? This also raises the question, do stock markets in the rest of the world reflect what happened in the United Kingdom and the United States?

Figure 4. United States Stock Market Cap and Government Debt Relative to GDP, 1792 to 2022

Global Stock Market Capitalization and Government Debt During the Past 225 Years

               Figure 5 compares World Market Cap and Government Debt over the past 225 years.  The World Market Cap line (black) divides the total market cap for all companies worldwide by world GDP. The G-20 Government Debt line (green) takes an average of the debt for advanced G-20 countries.  Unlike the market cap line, it does not include all the debt outstanding, nor is it based upon world GDP, but only the advanced G-20 countries.  Before 1850, the index included two countries with a Debt/GDP ratio that exceeded 100% (Netherlands and the UK) and two countries for which it was relatively low (Sweden and the United States).  Over time, more countries were added, including Portugal (1851), New Zealand (1860), Italy (1861), Canada (1870), Japan (1875) and seven countries in 1880 (Austria, Belgium, Denmark, France, Germany, Norway and Spain).

               In 1800, global stock market cap was around 1% of GDP while Debt was almost 100% of GDP.  Debt peaked in 1821 and declined during the 1800s.  By 1900, Global Market Cap was greater than Debt relative to GDP.  Debt rose, then fell back to its nadir in 1914, exactly when World War I began.  During the World Wars (1914-1945), debt steadily rose reaching its highest level in 1945. 

During the period between 1800 and the 1970s, debt and market cap were inversely related to one another.  When the government needed capital to fund either the Napoleonic Wars or the World Wars, capital flows to stocks were restricted and money flowed into government bonds.  During the period of peace between 1815 and 1914, money flowed out of government bonds and funded the expansion of the railroads and other industries in Europe, the United States and the rest of the world. Between 1945 and 1981, both government debt and market cap declined relative to GDP, but since 1981, both have risen dramatically.  Both stock market cap and government debt now exceed GDP globally.

Figure 5.  World Stock Market Capitalization and Advanced G-20 Debt as a Percent of GDP

Stock Market Capitalization in Developed Countries during the Past 200 Years

               Table 1 looks at stock market capitalization as a percentage of GDP in different countries between 1815 and 2022.  What may surprise some people is the decline in market cap relative to GDP between 1914 and 1981.  As we showed above, this was a general trend through the world between 1900 and 1981. Although we might think of the world in 1981 as being much more advanced than the world in 1914, as it was in terms of technology, few people realize that the stock market’s role in the economy declined during those years. Government’s role in the economy grew at the expense of the private sector.

               There was dramatic growth in the stock market’s role in the economy between the end of the Napoleonic Wars and the beginning of World War I.  Because there was general peace during those hundred years, capital was reallocated from government bonds to corporate equities, the standard of living improved, and new technology brought the world closer together.

Between 1914 and 1945, on the other hand, the stock market’s share of GDP declined in Europe.  The decline was especially dramatic in France, the Netherlands and Sweden.  Only Australia and Japan showed strong growth in the size of the stock market during those years.

               After World War II, European countries nationalized many of their main industries, including utilities, transports, banks, steel and other major sectors that had previously been privately owned.  In addition to this, higher inflation slowly ate away at the present value of future earnings and many feared that OPEC would permanently limit growth, causing a further deterioration in market cap.  By 1981, in countries like Austria, Belgium, France, Germany, Italy and Spain, the stock market represented less than 10% of GDP, less than it had been 100 years before. 

Few would have guessed that a dramatic reversal would occur over the next 20 years.  Not only were many industries that had been nationalized returned to the private sector, but the decline in inflation, the growth in globalization, the opening up of markets throughout the world, the collapse of Communism, the rise of emerging markets and the technological revolution that computers brought about caused a dramatic reversal in the role of markets in the economy.  In many countries, by 2019, stock market capitalization exceeded GDP.

Country	1815	1914	1945	1981	2019	2022
Australia		10.33	33.33	28.56	105.86	111.88
Austria		12.7	7.97	2.14	28.83	25.68
Belgium		82.65	71.49	8.61	70.05	57.8
Canada		49.55	54.31	34.72	135.22	133.52
Denmark		34.1	23.53	10.7	118.15	152.48
France	1.34	58.5	9.55	6.93	1055	106.8
Germany		47.51	35.27	9.19	51.14	45.72
India		4.55	4.17	3.69	78.67	105.39
Italy		18.21	14.8	6.22	40.75	29.66
Japan		17.64	47.22	35.19	113.01	126.75
Netherlands		124.36	74.93	15.14	132.85	134.5
South Africa		36.33	48.43	100.98	243.81	300.15
Spain		28.96	25.61	9.51	57.13	46.78
Sweden		42.11	21.8	16	152.99	156.36
Switzerland		47.2	16.6	34.02	247.51	219.51
UK	17.45	121.82	103.34	37.41	112.43	98.45
USA	7.08	47.53	39.5	42.6	156.83	165.05
World	1.27	37.03	31.88	22.51	113.75	141.42

Table 1. Stock Market Capitalization as a Percent of GDP, Various Years

Government Debt In Developed Countries During the Past 225 Years

               Most countries saw an increase in Government Debt relative to GDP between 1914 and 1945 as countries ran deficits to pay for the cost of World War I, World War II and the Great Depression.  In some countries, such as the United Kingdom, the United States, Canada, France and the Netherlands, the growth in government debt was dramatic. In each of those countries, government debt was greater than GDP by the end of the Second World War.  

Almost every country in our survey was able to reduce its government debt as a share of GDP between 1945 and 1981.  US government debt shrank from 121% of GDP in 1945 to 33% by 1981.  This was not because the government ran large surpluses, but because the deficits were smaller than the growth in GDP.  Government debt increased between 1945 and 1981, though at a slower rate than GDP causing the Debt/GDP ratio to decline.  Inflation also played a role as the real value of government debt declined.  Double-digit inflation hurt the holders of government debt dramatically and in real terms; fixed-income investors lost money between 1945 and 1981.

Country	1815	1914	1945	1981	2019	2022
Australia		18.38	44.87	19.29	72.07	88.06
Austria		124.59	34.2	27.29	78.21	76.22
Belgium		57.94	106.01	65.26	101.5	113.27
Canada		22.81	132.45	23.9	106.25	129.62
Denmark		15.86	32.02	45.67	38.57	45.19
France	17.15	78.72	159.38	15.45	108.89	124.35
Germany		9.46	37.44	17.78	58.79	58.8
India		20.57	24.68	41.77	67.62	77.87
Italy		67.97	52.83	58.06	134.15	149.95
Japan		55.92	88.65	40.93	235.93	221.71
Netherlands		48.25	171.67	31.76	54.6	59.21
South Africa		41.68	35.64	23.95	47.03	47.03
Spain		97.16	90.85	10.86	104.81	127.44
Sweden	8.42	18.12	49.92	49.31	53.9	57.34
Switzerland		7.9	79.14	12.19	36.4	39.7
UK	182.13	29.29	227.78	44.99	83.91	100.19
USA	41.9	2.66	121.47	32.88	104.53	118.35
World	61.32	42.56	86.08	33.2	87.11	95.6

Table 2. Government Debt as a Percent of GDP, Various Years

               Since 1981, however, government debt has generally increased, in some cases, exceeding GDP.  No country among those surveyed saw a decrease in the ratio of government debt to GDP.  However, there have been no major wars during the past 40 years that would necessitate an increase in government debt.  Instead, governments have chosen to run deficits to cover higher social expenditures.  With interest rates hitting historic lows, there were few constraints on restraining government debt. The recent increase in interest rates may put a brake on increasing government deficits, as has occurred in some emerging markets, but to date, developed countries have not felt that constraint.

Towards the Future

               By extending our coverage of the past, adding 100 years of history to our coverage of global market capitalization, we are able to better understand what may happen in the future.  Who would have thought that the stock market’s share of global GDP was smaller in 1981 than it was in 1881? Could the stock market’s share of GDP be smaller in 2123 than in 2023?

               Financial markets play an essential role in the global economy today.  But what will that role be in the next few decades?  Will the nationalism that is restricting trade today put a freeze on the growth in stock markets over the next few decades as it did between 1914 and 1945?  Will rising interest rates limit the growth in market cap as a share of GDP as it did between 1945 and 1981? Will the cost of paying interest on government debt constrain its growth? Will restrictions on trade with China and Russia expand? Or will stock markets become even more integrated than they did between 1981 and 2019 and a single market and generative AI dominate the world? Will the world avoid the temptations of the 1930s and encourage freer trade and return to the globalization that drove markets to expand in the 1980s and 1990s? 

We can increase our understanding of the past in order to improve our understanding of what may happen in the future, but as can be seen from the events of the past few years, no one can predict the future.  No one could have predicted the COVID pandemic and the war in Ukraine, but these two events have driven markets in the 2020s.  What will drive markets in the rest of the 2020s and in the 2030s? Will the 30-year cycle bring another surge in stock markets in the 2040s?  No one knows, but we can study stock markets in the past and know what limits their growth and performance in order to avoid those mistakes in the future. 

Unfortunately, there are signs that the world may be repeating the mistakes it made between 1914 and 1981 and higher interest rates may limit the growth of government debt.  What unexpected events will impact markets over the rest of the decade remains to be seen, but it appears that the globalization and low interest rates of the 2010s will not be repeated in the 2020s.