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The Suez Canal Connects the World
There were a number of companies that listed in London and Paris as well as on the Cairo and Alexandria Stock Exchanges in the 1800s and 1900s. The first company for which GFD has data is the Bank of Egypt which traded in London from 1856 until 1910. Several other companies came along in the 1860s including the Egyptian Commercial and Trading Co. (1863), Societe Financiere d’Egypt (1864) and the Anglo-Egyptian Banking Co. (1865-1920). However, the largest company in Egypt, the Compagnie universelle du canal maritime de Suez (Suez Canal Co.) went public in 1858 and ran the Suez Canal until it was nationalized by Egyptian President Gamal Abdel Nasser in 1956. GFD has data on the Suez Canal from its IPO in 1862 until 1940. During the late 1800s, the Suez Canal Co. was one of the largest stocks by capitalization that traded on either the Paris or the London Stock Exchange.Egyptian Stock Market Returns
When Suez shares started trading in London in 1875, the Suez Canal Co. represented 75% of the market cap of all Egyptian shares listed in London, and in 1940 when shares stopped trading, the Suez Canal Co. still represented about 85% of the market capitalization of Egyptian shares that traded in London. Therefore, GFD’s Egyptian stock index is more an index of shares in the Suez Canal than an index of shares in Egyptian stocks. For this reason, we have calculated GFD’s index of Egyptian stocks both with and without Suez shares so the two can be compared. Generally speaking, the Suez Canal Co. was also one of the largest companies traded in Paris with only the Paris, Lyons and Mediterranean Railway and Northern of France Railway being larger at the end of the 1800s. By 1900, the Suez Canal Co. was the largest company listed on the Paris Stock Exchange. Most of the other companies that were listed in London were either banks or real estate companies. This included the National Bank of Egypt (1899-1958), which was nationalized in 1960, the Bank of Egypt (1856-1910), the Land Bank of Egypt (1907-1930) and the Agricultural Bank of Egypt (1904-1837). Other prominent companies included the Egyptian Salt and Soda Co. (1905-1930), Anglo-Egyptian Oilfields Ltd. (1910-1961), Land and Mortgage Co. of Egypt (1880-1926), Alexandria Water Co. (1905-1930), Egyptian Markets Ltd. (1906-1927), and the Egyptian Delta Land and Investment Co. (1909-1930).The Future of Egypt
Egypt is a unique emerging market because of the dominance of the Suez Canal Co. in the Egypt’s market cap. The Suez Canal Co. was a French company with operations in Egypt with the British owning the largest number of outstanding shares. The Suez Canal Co. played such a prominent role in Paris that David le Blis included it as one of the stocks in their index of 40 shares that traded in Paris between 1852 and 1987. The Suez Canal Co. consistently represented over 75% of the market cap of the Egyptian stock market. When the Egyptian government nationalized the canal in 1956 and paid it off in 1962, there were few Egyptian shares left for investors to trade in either Egypt or London. Nevertheless, during most of its history, the Suez Canal Co. provided a liquid market which generated decent returns to its shareholders. However, Egypt is still struggling politically to provide the economic foundations that will enable the country to emerge as a developed economy. Whether Egypt can overcome its political problems and become a more market-oriented economy that follows in the footsteps of Israel and creates companies that can make products that investors prize throughout the world remains to be seen.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, Mexico50 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 Britain100 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.![](/images/wp-content/uploads/2019/10/Blog-1208x720-16-1024x576.jpg)
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.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.![](/images/wp-content/uploads/2019/10/Blog-1208x720-17-1024x576.jpg)
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?Shares Outstanding or Price Changes?
The Share Value Index for global stocks is provided below. As can be seen in Figure 2, the number of shares outstanding has steadily increased over the course of the past 100 years with most of the increase coming after 1990 as hundreds of new companies issued shares to the public. However, the growth in market capitalization slowed in the 2010s, leaving overall market cap lower in 2018 than it had been in 2010.
If you look at GFD’s World Index adjusted for inflation provided in Figure 3, you can see several distinct trends. There was little change in the index, after adjusting for inflation, from 1920 until 1980. There were bottoms in 1921, 1932 and 1948 and peaks in 1929 and 1937. There was a steady increase in the value of the index between 1948 and 1960 as the world recovered from World War II, followed by a plateau until 1973 when stagflation drove markets down for the rest of the decade. However, the greatest change in the World Price Index occurred between 1982 and 1999 when the index increased five-fold from around 150 to almost 750. It then lost half of its value in 2000-2001, regained its 1999 high in 2007, fell back in 2008 and now has reached new highs. Although there was a large increase in the Share Value Index between 2000 and 2010, it appears that most of the increase in the market capitalization/GDP ratio came from an increase in the price investors were willing to pay for stocks, not in the number of shares outstanding.
This leaves the question, why did this once-in-a-century adjustment in the price of shares occur between 1982 and 1999? It should be remembered that long-term government bond yields decreased dramatically after 1981. The yield on the 10-year government bond fell from 16% in 1981 to 5% by 1999. This lowered the discount rate on future cash flows to corporations and contributed to the increased value of stocks and other financial assets.