British stock markets from 1829-1929

Interesting piece by Gareth Campbell, Richard Grossman and John Turner:

Although long-run stock market data are an important indicator, obtaining them is challenging. This column constructs new long-run broad-based indices of equities traded on British securities markets for the period 1829-1929 and combines them with a more recent index to examine the timing of British business cycles and compare returns on home and foreign UK investment. One finding is that the capital gains index of blue-chip companies appears to be a good bellwether of macroeconomic behaviour.

Can we use these stock market indices to understand British macroeconomic fluctuations over the long run? We use Chadha et al.’s (2000) catalogue of business cycle peaks and troughs from 1857 to 1954, and the OECD indicators on reference turning points from 1955 to 2018.  We construct business cycle diagrams in the style of Burns and Mitchell (1946). For each of the business cycles, we rebase the blue-chip index to be 100 at the cycle peak and then focus on the four-year period around this point. We then take the average value of the rebased index each month across all of the business cycles (Figure 4).

Figure 4 Blue-chip index performance over the business cycle, 1857-2018

The capital gains index of blue-chip companies appears to be a good bellwether of macroeconomic behaviour. During the two years prior to the business cycle peak, the index increases by an average of 10.7%. The index peaks one month before the peak of the business cycle, and then declines steadily thereafter. The index bottoms out 20 months following the cyclical peak, losing an average of about 7.0% from its peak value.

Superb bit of history…

 

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