A newer advisor asked me for a good book on market history, and there are lots of them, but what they were looking for was something that would give all the little factoids and context that I frequently share. (The proximate reason for the request was they didn’t realize anything notable had happened in the market in 1987.) I don’t know of a book like that, so I thought I’d do a little potted history here. This is idiosyncratic, U.S.-centric, and focuses mainly on the 20th century.
1792 – NYSE founded by a group of traders who famously met under a buttonwood tree on Wall Street. (It was called Wall Street because it was originally the street that ran along the wall of the Dutch fort on the tip of New Amsterdam – now Manhattan.)
19th Century – frequent booms and busts and cycles of inflation and deflation (no net of either because of the gold standard). The economy is mostly agrarian, but there was a famous railroad bubble where investors lost a great deal of money – as they often do on exciting new technologies. This is a recurring historical cycle; investors lose on the new, new thing, but the thing gets built from all the capital thrown at it and life is better as consumers (rather than investors) win. Charles Dow creates the first stock index in 1884. It was a transportation index consisting of almost exclusively railroad stocks. In 1896 he created the Dow Jones Industrial Average by averaging the prices of 12 industrial stocks. I.e., adding up the prices and dividing by 12. The divisor has to be adjusted for corporate actions (splits, etc.) and for changes in the components (which have different prices) so it is currently 0.16242563904928. This is a very dumb way to create an index but there wasn’t anything better at the time. The number of components was increased to 30 in 1928. When both the industrial and transportation indexes went in the same direction it was considered a broad-based market move. (This was part of Dow Theory.)
1900s – No federal reserve yet, and there is a market crash and run on banks and trust companies (which functioned as banks back then) in 1907. J.P. Morgan steps in and essentially acts as a central banker. Subsequently people thought that maybe the life or death of the economy shouldn’t be dependent on one private citizen’s rectitude and responsibility and a proper Federal Reserve Bank should be established.
1910s – WWI breaks out and the widespread sales of war bonds (“Liberty Bonds”) introduced the masses to investing. Before that, the Federal reserve was created in 1913, and the 16th amendment was passed that year as well. This permitted income taxes to be levied. As with most taxes, it was pitched as (obviously) having a low rate and apply only to rich people: 1% on incomes over $3,000 and a 7% on incomes over $500,000. Those are equivalent to about $100,000 and $16.5 million today. Alas, it didn’t last (it never does), and the 1916 Revenue Act and the War Revenue Act of 1917 increased the highest rates to 77% by 1918. In 1914 the stock market was completely closed for over four months due to WWI and was only partially reopened for an additional four months.
1920s – After a shaky start to the decade (severe deflation, unemployment, and economic contraction) a bull market boom began, and the “roaring twenties” was in full swing. Tech stocks such as automobiles, airplanes, and “Radio” (RCA) were the cat’s pajamas/bee’s knees (silly slang is not a modern phenomena). Margin requirements were just 5-10% in many cases. Smaller investors frequented “bucket shops” which took bets on stocks but didn’t actually invest any money in them (though customers may have thought they were investing). “Wirehouses” were more reputable companies that were large enough to have lines (wires) to the exchanges so they could place actual trades. Irving Fisher (an enormously respected economist) famously says in 1929 (nine days before the crash) that stocks had reached “a permanently high plateau.” The crash occurred on Black Tuesday, October 29th, 1929. Fee-only investment advisors were called “investment counselors” to differentiate them from tipsters, touts, and customer’s men (i.e., stock brokers). (In previous centuries brokers were called “stock jobbers” as well.)
1930s – The Great Depression ensued. There was deflation so stocks did a little better in real dollars versus nominal dollars, but still, using monthly nominal dollars for the S&P 500 and 5-yr Treasurys, in May 1932, a 60/40 portfolio was 62.1% off the August 1929 all-time high, and in March 1938, a 60/40 portfolio was 32.0% off the February 1937 all-time high. That new high in 1937 was fleeting so it didn’t seem like a recovery from 1929 yet. An investor in stocks in August 1929 did not recover (in real dollars with dividends reinvested) permanently for over 15 years (January of 1945). Ben Graham (the father of value investing) was buying “cigar butts” (stocks with assets greater than their prices – terrible companies maybe, but there might be one or two more puffs left in them). He (with others) founded the New York Society of Security Analysts in 1937 to professionalize investing.
1940s – After the war, people expected the Great Depression to resume – it did not, but an entire generation vowed to never buy stocks again. Milton Friedman, then a young government staffer, ironically was instrumental in implementing a new idea called “withholding” for taxes. (He later apologized. Imagine how much lower income taxes would be if everyone had to write a check for the entire amount at once each April.) Wages and prices are frozen during the war, so companies began to offer non-taxable fringe benefits such as health insurance to get around the restrictions, which, of course, created the third-party-payer problems we still contend with.
1950s – The S&P 500 index is created on March 4th, 1957. It was appended to an earlier index that had 90 stocks, so you often see data back to 1926 labeled “S&P 500,” but, strictly speaking, it isn’t.
1960s – This was the go-go years where growth stocks were ascendant. It was also the era of slapping “tronics” onto the end of a company name to get a stock pop (much as was done with “.com” thirty years later – there’s really nothing new in markets). It was also the era of “professional” management who thought that any company in any industry could be run by scientific principles, so conglomerates bought companies as subsidiaries which had no synergies or logic whatsoever. (This was all unwound in the 1980s with LBOs, spinoffs, and takeovers.) The “nifty-fifty” were fifty stocks considered so blue chip that the price didn’t matter. They were “one-decision” stocks, you only had to decide to buy them, because you would never sell them. Nonetheless (or more likely, due to this), a stock investor in November 1968 didn’t see their investment increase in real dollars with dividends reinvested until March of 1983 – over 14 years later. It turns out that it very much does matter what you pay for an investment. Merrill Lynch donated $50,000 to the University of Chicago to found the Center for Research in Security Prices (CRSP). For the first time someone would determine what the return on stocks had been (and that active managers almost universally failed to achieve that return). The first CFA examination occurred in 1963. The psychologically meaningful DJIA hit 995.15 on February 9th, 1966; but didn’t permanently cross 1,000 until November 1982 after the election of Ronald Reagan. There was a “paperwork crisis” as the bull market volumes (and manual processes) created issues. The market started closing early to deal with it and then closed completely on Wednesdays in the latter half of 1968.
1970s – The United States goes fully off of the gold standard so now persistent inflation exists (though this is almost certainly better than the alternative). Stock commissions are deregulated on May 1st, 1975 and brokerage firms are scared, but Charles Schwab decided to lean into the pricing flexibility and compete on price – a novel concept. The rates banks could pay on savings was capped by law (and below inflation) so money market funds were created to work around this. Merrill Lynch created NOW (Negotiable Order of Withdrawal) accounts which gave investors checkbooks that they could use to access their funds. Most of their competitors thought this innovation was insanity as you weren’t supposed to let people easily take funds out of their accounts, but it turns out if they know they can take it out, they will put more in in the first place. The Chicago Board Options Exchange (CBOE) launched with the first listed options. Standardized contract sizes, strike prices, and expiration dates, created a liquid secondary market. The first broad-based index fund available to retail investors was launched by John Bogle at Vanguard on December 31st, 1975. (It was nicknamed Bogle’s Folly – after all, who would want “guaranteed mediocrity?” Today it has about $1.5 trillion in assets.)
1980s – The 1986 tax act is an enormous simplification and lowering of tax rates with a top rate of 28% on a much broader base. There is a huge Japanese stock market bubble in the latter half of this decade. It took until 2024 for the Nikkei to reach the 38,915.87 it first reached in 1989. There was a massive stock market crash on Black Monday, October 19th, 1987 when the DJIA dropped 22.6% (though the year as a whole had a perfectly normal total return of 5.25%). Tickers were running over an hour behind; meaning investors sold in a panic without knowing what prices even were and then didn’t know if their trades were even executed. See here for more.
1990s – Stock settlement was T+5 until 1993 when it went to T+3 (it went to T+2 in 2017, then T+1 in 2024). TIPS, Roths, and lower long-term capital gains tax rates were all introduced in 1997. (In the case of capital gains rates, I should really say “re-introduced.” From 1942-1978 taxpayers could exclude 50% of capital gains on assets held for at least six months.) The “dot com” boom was huge. The stock market (S&P 500) returned 34.11% in 1995 and 20.26% in 1996 and Alan Greenspan gives his famous “Irrational Exuberance” speech in December of that year. Nonetheless stocks go on to return 31.01% (1997); 26.67% (1998); and 19.53% (1999).
Early 2000s – The S&P 500 goes down 10.14% in 2000 and a further 13.04% in 2001, but “everyone knows” it has never gone down three years in a row so that simply can’t happen. Of course, it returns -23.37% in 2002. As I frequently point out, the historical worst-case scenario was not the worst historical case just prior to it occurring. Financial instruments were quoted in eights (stocks until 1997), or ‘steenths/teenies (sixteenths) until “decimalization” in 2001 which reduced spreads enormously. The 2001 tax act (EGTRRA) and the follow-on 2003 tax act (JGTRRA) dramatically lowered income tax and estate tax rates, as well as significantly expanding and simplifying IRA and qualified plan options.
I’m going to stop there – before the GFC. I assume most people know more recent history.
For books that offer a broad sweep of market history I recommend Manias, Panics, and Crashes: A History of Financial Crises by Charles Kindleberger or Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor.
For more targeted reading, a great place to start is the Wiley Investment Classics series. I’d read them by publication date; they did the better ones first. Here is a list sorted that way.
Finally, I recommend Against the Gods: The Remarkable Story of Risk by Peter Bernstein