When Standard and Poor’s introduced the S&P 500 index in March 1957, it revolutionized the index world and created a benchmark for the stock market that is still used today. The original S&P 500 index included 425 industrial stocks, 15 rail stocks and 60 utility stocks. The S&P 500 maintained this composition until July 1976 when finance stocks were added to the index. The index included 400 industrials, 40 utilities, 40 finance and 20 transport stocks in 1976. Allocation by sector was abandoned on April 6, 1988 and today S&P uses their GICS sectors with no attempt to allocate stocks by sector.
When the S&P 90 Stock Index was introduced in 1928, it was the broadest cap-weighted daily index that was calculated in the United States and included 50 industrial stocks, 20 rail stocks and 20 utility stocks. Between 1928 and 1957, the number of industrial stocks grew dramatically. When Lew Schellbach introduced the S&P 500 on February 27, 1957, almost all of the expansion went to the industrial sector. The number of industrial stocks increased from 50 to 425 while the number of railroad and utility stocks hardly changed.
Advances in electronic calculation between 1928 and 1957 enabled Melpar Inc. to calculate a daily index of 500 stocks which could also be calculated on an hourly basis. More stocks could have been included in the index, but the other stocks were traded thinly or lacked sufficient public interest to be tracked on a daily or hourly basis. The 500 stocks that were put into the S&P 500 covered 90% of the stock market’s capitalization, and returns on the S&P 500 would differ little from a total market index that could have been calculated.
To provide some historical perspective, the data for the S&P Composite was extended before 1957 in two ways. First, daily data from the S&P 90 Index was used to provide a daily history back to 1928. Second, the Cowles Commission had calculated a composite extending back to 1871. Weekly data from Standard Statistics was used from 1918 to 1927 and the Cowles Commission data was used from 1871 to 1917.
What few people realize is that the composite index that Standard Statistics started calculating in 1918 was still being calculated in 1957 and the index included 480 stocks consisting of 420 industrials, 20 railroads and 40 utilities in 1957. So the new S&P 500 was little different from the existing S&P Composite. The difference was that in 1956, the broader S&P Composite was only calculated once a week on Wednesday, not daily. The S&P 90 was used to extend the S&P 500 back to 1928 because it was calculated on a daily basis, not because it was the broader index.
The existence of two Composite indices between 1928 and 1957 allows us to compare the performance of the two composites. Basically, the S&P 90 was a large cap index that included the 50 largest industrial stocks while the Composite included 350 industrials in the 1940s (402 stocks in total) and 420 industrials in the 1950s.
The chart below compares the performance of the two indices between 1928 and 1957. The data for the S&P 90 is included in the S&P Composite from 1928 to 1957 and the data for the broader composite is represented by the green line.
Canada has an interesting stock market history because in addition to its stock exchanges in Montreal and Toronto, shares in Canadian companies also traded in London and New York. Canada was a British colony until 1867 when it gained its independence from the United Kingdom, and many Canadian securities were traded in London until World War I, though many of the securities listed in London were traded in Canadian Dollars, not British Pounds.
Trading in Montreal and Toronto
Brokers began trading shares at the Exchange Coffee House in Montreal in 1832 and the Montreal Stock Exchange was founded in 1874. The Toronto Stock Exchange was begun by the Association of Brokers in 1852, was formally founded in 1861 and incorporated in 1878. So, until the 1870s, Canada had no formal stock exchange. Until the 1930s, the Montreal Stock Exchange was the larger and more important of the two Canadian exchanges, but with the political problems of the 1960s and 1970s, including the adaptation of French as the official language in Quebec, more and more of the trading moved to Toronto. In the 1980s, Montreal became a derivative exchange and in 2008, the Montreal Exchange was formally acquired by the TSX Group. After World War I, Canadian companies listed on the New York Curb and shares in many of Canada’s largest companies were available on the Curb/American Stock Exchange. Until the 1930s, the Canadian Dollar and U.S. Dollar were linked at par to each other, but beginning in the 1930s, the currencies floated against one another and the prices in Montreal and Toronto differed from the prices in New York. Two Canadian companies, the Canadian Pacific Railroad and International Nickel were included in the Dow Jones Averages from the 1930s to the 1980s. There are many similarities and differences between Canadian stocks and U.S. Stocks. The market capitalization of the Canadian stock market has generally been about 10% of the size of the American Stock market. Canada has followed the American model more than the European model, and it avoided the military destruction of World War II and the wave of nationalizations that struck Europe after World War II. Canadian companies created to exploit the country’s mining and oil resources dominated the Canadian exchanges after World War II. Consequently, Canada’s market capitalization was the third largest in the world in 1950 after the U.S. and the U.K. The graph below shows how the distribution of sectors within the Canadian stock market changed over the past 200 years. As might be expected, banks have always played a prominent role in the economy. Canada has relied on a small number of national banks rather than thousands of state banks as in the United States. This is an important reason why Canada went through the 1930s without a single bank collapsing into bankruptcy while thousands of banks went under in the United States. Canada also has had a smaller number of companies dominating each sector and avoided the competitive battles that dominated industries in the United States. While American companies constantly sought growth through issuing new shares, acquiring other companies and growing through mergers and acquisitions, Canadian companies were more likely to rely upon reinvestment of capital than issuing new shares. In the graph below, the growth of transports in the1800s and its decline in the 1900s is visible, a pattern that occurred in all countries. The importance of energy and material stocks is the other defining feature of the stacked sector graph below. As in the United States, you can see the energy sector grow in the 1970s and 1980s when the price of oil went from $3 to $30, its demise in the 1990s and its resurgence after 2000 when the price of oil went exceeded $100. Material stocks grew in size in the 1930s after the price of gold and silver rose in price, then shrank back later.
Canada Market Capitalization by Sector 1828 to 2018.
But which companies represented these changes in Canadian stocks? The history of the largest companies in the Canadian stock market is provided below.
The Governor and Company of Adventurers of England Trading into Hudson Bay
This was the official title of the first joint-stock company that was established in Canadian territory. The company was established in London on May 2, 1670 to collect furs from Canada and sell them in Europe. The company issued 105 shares of stock at £100 in 1670 giving the company a market cap of £10,500 or about $50,000. A flurry of trading in the 1690s drove the price of shares up to 260, but shares declined back to par at 100 by 1700. Unfortunately, there is no data on the price of Hudson Bay shares in the 1700s. The company recapitalized in 1821 and expanded the number of outstanding shares to 4,000. Shares traded at 160 in 1823 giving the company a market cap of $80,000. The price gradually rose to 268 in 1842 and in 1863, the company reorganized with 100,000 shares outstanding. The Hudson Bay Company remained the largest company in Canada until 1850, by which time its market cap had increased to $1.27 million. Unfortunately, we lack price data for the Hudson Bay Co. in the 1850s and 1860s, and although we know that the Hudson Bay Co. was the largest company in Canada in 1863 and 1864, whether it was larger than any of the other companies in Canada in the 1850s is difficult to discern.Banks and Railroads
Until 1825, there weren’t any other stock companies that operated in Canada. Then in 1825, the Canada Company was established to encourage emigration to Canada. However, it was the banks and railroads which eventually became the largest companies in Canada over the next eighty years. Until the coming of the transcontinental Canadian Pacific Railroad in 1883, the title of largest company in Canada would switch from one company to another. The leaders included the Bank of British North America (1852, 1860, 1861) which was incorporated in London in 1836 and established branches throughout “British North America” as Canada was known before it became an independent country in 1867. The Bank of British North America merged into the Bank of Montreal in 1918. The Great Western Railway of Canada stretched from Buffalo to Detroit and moved up into northern Ontario. This railroad was the largest company in Canada from 1853 to 1858 and in 1862, 1865-1869, 1871, 1872, 1879 and 1880. The railway was taken over by the Grand Trunk Railway of Canada in 1882. The Grand Trunk Railway was the largest company in Canada in 1859, but its stock price declined in 1860 and it was never the largest corporation in Canada in any other year. The Grand Trunk provided a Canadian route from Boston and New York to Chicago and had its headquarters in Montreal. A northern route of the railroad went from Montreal to the shores of Michigan. The railroad crossed over into Michigan and continued to Chicago. The Grand Trunk was asked by the Canadian government to build a railroad that crossed the continent to British Columbia, but the railroad refused and the Canadian government established the Canadian Pacific in 1881 to create a Canadian transcontinental railroad. The largest bank in Canada in the 1800s was the Bank of Montreal which held the crown of largest corporation in Canada in 1870, 1873, 1878, 1881 and 1882. Once the Canadian Pacific was established, however, the bank lost control of the crown. The Bank of Montreal was established in 1817 making it Canada’s oldest bank. Today, it operates as BMO Financial Group and although it is not the largest bank in Canada today, it is one of the largest, and is listed in both Toronto and on the New York Stock Exchange.The Canadian Pacific
When the Grand Trunk Railway refused to build a transcontinental railway to link eastern Canada with British Columbia on the Pacific Coast (the United States had completed its transcontinental railroad in 1869 when the Central Pacific and Union Pacific linked up in Utah), the government of Canada established the Canadian Pacific in 1881 to join eastern and western Canada together. The Canadian government had promised to extend a railroad to British Columbia when the province joined Canada in 1871. The transcontinental railroad reached British Columbia in 1885. The Canadian Pacific was the largest corporation in Canada from 1883 to 1928 and was listed simultaneously in Toronto, Montreal, New York and London. The railroad become so prominent that the Canadian Pacific was part of the Dow Jones Transportation Average from 1933 until 1988. The railway reorganized itself in 1996 and in 2001 and the third incarnation of the company still trades today. The railway was instrumental in settling the great plains between eastern Canada and British Columbia and making Canada the country it is today.Oil and Nickel
Two companies dominated the Canadian stock market from the 1930s to the 1970s, Imperial Oil Ltd. and Inco., Ltd. (then known as International Nickel). Although Imperial Oil still trades in Canada and on the New York Stock Exchange, Inco, Ltd. was acquired by the Companhia Vale de Rio Dulce in 2007. The Imperial Oil Co., Ltd. incorporated in Canada in 1880 and is an integrated oil company that produces, refines, distributes and sells oil throughout Canada. Imperial Oil was the largest company in Canada in 1929, 1931-1934, 1948-1954, 1956-1958, 1971-1975 and in 1982. Other Oil companies that claimed the crown were TransCanada Corp. in 1975 and 1977 to 1979, Gulf Canada in 1980 and Texaco Canada in 1981. Oil was an important part of the Canadian economy during the 20th Century and will continue to be in the 21st Century. International Nickel has control over the largest nickel reserves in the world. The company changed its name to Inco Ltd. in 1976 and it was the largest company in Canada from 1935 to 1947, in 1955, from 1959 to 1970 and in 1976. Although International Nickel was a Canadian company, it was part of the Dow Jones Industrial Average from 1933 to 1987.Telephones and Banks
Resources and transports dominated the Canadian stock market throughout most of the 20th Century, but the telecommunications revolution that transformed the world at the end of the 1900s also impacted Canada. Two of its telephone companies, Bell Telephone of Canada and Nortel Networks claimed the title of the largest company in Canada in the 1980s and 1990s. Bell Telephone of Canada, later known as BCE, Inc. was the largest company from 1983 to 1991 and in 1993 while Nortel Networks was the largest company in 1992 and from 1996 to 2001. The only break in the rule of the telephone companies was in 1994 and 1995 when Seagram was the largest company in Canada. During the 21st Century, finance firms have taken the lead position in Canada. The Royal Bank of Canada was the largest company in Canada in 2002, 2003, 2005 and from 2014 to 2017. Toronto Dominion was the largest company between 2006 and 2013, and Manulife Financial was the largest company in 2004. The domination of the Canadian stock market by banks is likely to continue since in 2017, the top three positions were held by banks with the Bank of Nova Scotia coming in at number three.Into the Twenty-First Century
The sectors and companies that dominate the Canadian economy over the next twenty years are likely to come from the finance and resource sectors. Banks will remain strong while oil stocks are likely to challenge the banks whenever the next oil boom or financial decline occurs. However, historically, banks have been much more conservative in their lending and trading than their American brethren to the south. You do not have a history of banks collapsing as a result of overlending or overtrading as happened in the United States. If a bank weakens, it is absorbed by another bank. Resources and banking are likely to be the drivers of the Canadian stock market in the century to come.| Year | Company | Market Cap |
|---|---|---|
| 1820 | Hudson's Bay Company | 0.8 |
| 1830 | Hudson's Bay Company | 1.37 |
| 1840 | Hudson's Bay Company | 1.68 |
| 1850 | Hudson's Bay Company | 1.27 |
| 1860 | Bank of British North America | 4.94 |
| 1870 | Bank of Montreal | 13.92 |
| 1880 | Great Western Railway of Canada | 21.91 |
| 1855 | Great Western Railway of Canada | 2.63 |
| 1890 | Canadian Pacific Railway Ltd. | 49.16 |
| 1900 | Canadian Pacific Railway Ltd. | 61.10 |
| 1910 | Canadian Pacific Railway Ltd. | 362.36 |
| 1920 | Canadian Pacific Railway Ltd. | 348.56 |
| 1930 | Canadian Pacific Railway Ltd. | 520.93 |
| 1940 | International Nickel (Inco, Ltd.) | 403.17 |
| 1950 | International Nickel (Inco, Ltd.) | 751.94 |
| 1960 | International Nickel (Inco, Ltd.) | 1712 |
| 1970 | International Nickel (Inco, Ltd.) | 3417 |
| 1980 | Gulf Canada Ltd. (British American Oil) | 5262 |
| 1990 | BCE Inc. (Bell Telephone of Canada) | 12073 |
| 2000 | Nortel Networks Corp. | 147300 |
| 2010 | Toronto-Dominion Bank | 129677 |
| 2017 | Royal Bank of Canada | 149717 |
In previous articles, we have traced the growth in the market capitalization of shares in the world back to 1900 and in the United States back to 1791. This article traces the trends in both the market capitalization of shares and of British government debt in Great Britain since 1690. During the 200 years from 1690 to 1900, the market cap of shares listed in the United Kingdom was larger than in any country in the world, with a significant portion of the market capitalization occurring because of companies that operated in the British Empire, but outside of the United Kingdom.
There was very little change in the market cap of British shares in the 1700s when most of the Britain’s capital went to funding the debt incurred by Britain’s wars with France, but in the 1800s, as peace settled over Europe, British debt declined and equity capital grew. The 1900s saw a rollercoaster ride as wars, inflation and government restrictions on equity capital imposed their toll on the United Kingdom. However, during the 1800s, as the size of British government debt declined, this freed up capital which the United Kingdom used to build the modern world, funding railroads, bank, utilities, mining and other industries throughout the world.
A Century of War
As William Robert Scott illustrated in The Constitution and Finance of English, Scottish and Irish Joint-Stock Companies to 1720, many corporations that were established in England before 1720 gave British companies the right to trade in colonies such as India, Canada and the United States, but also gave these companies the right to trade with Russia, Africa and other parts of the world. Very few of these companies were large enough for their shares to trade regularly, but some of these companies laid the foundations for the London stock market as we know it today. Shares were traded in coffee houses before the London Stock Exchange was established in 1801 and The Course of the Exchange kept track of the prices of stocks that were traded. Most of the stocks that were bought and sold in London in the 1690s were foreign companies. This included the East India Company, The Royal African Company, the Hudson’s Bay Company and the South Seas Co. Foreign companies also dominated the stock markets of Amsterdam (East India Co. and West India Co.) and France (Compagnie des Indes). In 1694, the Bank of England was established after providing a non-repayable loan to the English crown. In the first 20 years of the 18th Century, both British government debt and the capitalization of the stock market increased. Government debt increased as a result of the War of the Spanish Succession between 1701 and 1714. In 1720, the British government attempted to convert its debt into shares of the South Sea Co., creating the South Sea bubble. The value of outstanding British government debt had risen to 60% of GDP (see Figure 2) by 1720 and as a result of the South Sea bubble, equity capitalization rose to 40% of GDP in 1720 (see Figure 1). Thereafter, the level of outstanding government debt and equity capitalization diverged. Britain fought a number of wars over the next 100 years, which significantly increased its debt. The principal wars were the Seven Years’ War (1754-1763), the American Revolutionary War (1775-1783), and the French Revolutionary Wars and Napoleonic Wars (1792-1815). As Figure 2 shows, this increased the ratio of British government debt to GDP to 230%. Many other countries, including France, the Netherlands, Russia and Austria defaulted on their debts during the Napoleonic Wars, but Great Britain did not. Investors in the 18th Century wanted a source of steady income from the securities they held, and British government consols provided a reliable source, paying 3% in interest each year. However, Britain’s wars absorbed all of the available capital at the expense of the stock market. The British stock market in the 1700s was dominated by the “three sisters,” the Bank of England, the South Seas Co. and the East India Co. Virtually all of the trading in corporate securities in England in the 1700s was focused on those three companies. The result was a gradual decline in the market capitalization of English shares from 1720 to 1800, declining to almost 10% of GDP in 1800 while government debt rose to 230% of GDP by 1815.
A Century of Peace
Once Napoleon was defeated at Waterloo in 1815, the Napoleonic wars were over, and the century from 1815 to 1914 saw short and insignificant wars. Consequently, Britain not only paid off a significant portion of its outstanding debt, but as GDP grew in those hundred years, the debt/GDP ratio shrank from 230% in 1815 to 30% in 1914. This freed up capital to flow into shares and with this capital, Britain was able to help build the modern economy not only in Britain, but around the world. Money first started flowing into equity in the 1790s during the canal boom in which some company share prices doubled, tripled, or even quadrupled in price, but soon fell back. A second canal bubble occurred in the 1810s and a mining bubble occurred in the 1820s. Please remember that before 1801, no London Stock Exchange existed. All share trading was carried out in coffee houses and elsewhere, and most of the trading that was done was in British government consols, not company shares. The canal boom of the 1790s occurred in the middle of Britain where these companies operated, not in London. Shares were usually bought and sold at auction. A broker would announce in a local newspaper that certain canal shares would be sold at auction the following day. People would show up and someone would buy the shares. Unfortunately, newspapers announced the auction of the shares, but almost never printed the results, so almost no data of the canal bubble of the 1790s is available. Beginning in 1806, brokers began publishing share lists in magazines and newspapers which we can use to track the prices of shares offered for sale, and in 1811, The Course of the Exchange began printing share prices of canals and other companies that were traded on the London Stock Exchange. The canal bubble of the 1810s and mining bubble of the 1820s had no long-term impact on the ratio of stock market capitalization to GDP.
The railroad bubble of the 1840s, however, initiated a steady increase in the capitalization/GDP ratio that would continue for the next 75 years as the peace of the 1800s freed up capital to invest in Britain and the world. Whether it was railroads in Britain, France, India, the United States, Argentina or dozens of other countries and colonies, Britain provided the capital to build the railroads which modernized the world. Britain also invested in banks, utilities, mining and other industries essential to the modern economy. Shares issued by French and American railroads were eventually repatriated to those countries, but shares in India, Argentina and other countries were owned by the British up until World War I began.
Seventy-Five Years of War
World War I began in August 1914 and every stock market in Europe closed. The London Stock Exchange remained closed until January 1915 and reopened with restrictions on trading. The British government placed restrictions on the issue of new capital by companies so all available funds could be directed at purchasing the bonds needed to pay for the war. At the same time, the British government sold foreign shares, such as American railroads, which were listed on the London Stock Exchange in order to use the capital to fund the war. Inflation further reduced the value of equities relative to GDP. Consequently, the capitalization/GDP ratio fell from 150% in 1914 to under 70% by 1920 while the government debt/GDP ratio rose from 30% to 180%. During the twenty years between the end of World War I and the beginning of World War II, the ratio of government debt/GDP fell to 125% while the market cap/GDP ratio rose to 160%. After World War II began, Britain’s debt/GDP ratio soared again, rising from 125% to 240% by 1945, higher than it had been at the end of the Napoleonic Wars. Meanwhile, the market cap/GDP ratio plunged from 160% to 50% of GDP. During the 40 years after World War II, Labour and the Conservatives battled over the right economic policy for post-war Britain. Labour wanted to plan the economy and the Conservatives wanted to leave more of the economy to the private sector. Industries were nationalized, privatized and then renationalized. Labour governments wondered why businesses couldn’t just follow the directives of government as they had done during World War II. The dénouement to this process came in the 1970s under Harold Wilson when a significant recession and inflation caused the greatest stock market crash in British history. Few people realize that the 1973-1974 decline in the British stock market was even worse than the decline during the Great Depression. While the FTSE Index declined 47% between 1929 and 1932, the British index declined by 73% between 1972 and 1974, and after adjusting for inflation, fell over 80%. The good news is that the inflation reduced the government debt/GDP ratio, with it reaching 40% in the 1970s and 20% by 1990. Meanwhile, the ratio of market cap/GDP plunged to under 20% during the 1972-1974 bear market, reaching levels that hadn’t been seen since the early 1800s.The Big Bang and Recovery
In 1979, Margaret Thatcher became the new prime minister of Britain and she redirected the economy toward economic freedom and away from government intervention. The Big Bang freed up capital markets on October 27, 1986 and capital controls were eventually eliminated in Britain. Industries were privatized and the market cap/GDP ratio soared from 20% in 1974 to 175% in 1999 before falling back after the dot.com bubble burst. Although central government debt has risen to 80% of GDP today, it remains below 100%, and certainly way below the 200% that occurred after the Napoleonic Wars and World War II. Although Britain’s role in the global economy has shrunk significantly since the 1700s and 1800s, the impact of war on the availability of capital and Britain’s ability to build the modern world economy in the 1800s cannot be dismissed. If the capital that flowed into British government debt in the 1700s had been available to the private sector, could the Industrial Revolution and the spread of railroads have occurred in the 1700s and not the 1800s? If Britain, France and Germany had fought wars with each other between 1815 and 1914 instead of enjoying a century of peace, would the global economy be as advanced as it is today? Would British capital have been tied up in paying for useless wars rather than using its capital to build the modern economy? How much more advanced would the world be if World War I, World War II and the Cold War hadn’t absorbed capital that could have been reinvested in the economy? No one wants wars, but nationalism has often gotten the better of common sense in the past and as anyone who looks at the flows of capital in Britain in the 1700s, 1800s and 1900s can see, wars imposed significant long-term costs on the British and the global economy. Anyone promoting a military war, trade war or currency war in the future should keep this in mind.
Many people believe that Abraham Lincoln was the greatest President of the United States. Not only did his steadfast leadership help the United States to survive the Civil War, but as President he pursued his vision of a united country, free from slavery and war. Lincoln’s vision of America went beyond winning the Civil War and freeing the slaves and extended to uniting the East and West by building a transcontinental railroad across the United States. As President, Lincoln was instrumental in approving the three routes that eventually crossed the continent to bring the two halves of the country together and ensure that the United States was a single country from north to south and from east to west. Lincoln approved three railroads, the Northern Pacific, the Central Pacific and the Southern Pacific. The Central Pacific was renamed the Union Pacific during the Civil War and on May 10, 1869, a “golden spike” was driven into the ground at Promontory Summit in the Utah Territory uniting the eastern and western tracks into a single transcontinental railroad. Although few people may realize it, Abraham Lincoln was intimately involved with helping the railroads to cross the continent even before he became President. Lincoln worked for the Illinois Central between 1852 and 1860, defending them in cases that were brought before the district court. He also argued and won three cases for the Alton & Sangamon Railroad, which the Supreme Court found in favor of the railroads. The most important legal case he handled before becoming President was the Rock Island Bridge case in 1856 which brought him into the national spotlight. In 1858, the Lincoln-Douglas debates further enhanced his prestige, and in 1860, Lincoln became President of the United States.
