The Fifth Financial Era: Singularity

Global Financial Data has produced indices that cover global markets from 1601 until 2018. In organizing this data, we have discovered that the history of the stock market over the past 400 years can be broken up into four distinct eras when economic and political factors affected the size and organization of the stock market in different ways. These four eras were Mercantilism (1600-1799), Free Trade (1800-1914), Regulation (1914-1981) and Globalization (1981-).

The first era covers the period from 1600 until 1799 when financial markets funded government bonds and a handful of government monopolies. The British East India Company was established in 1600. For the next 200 years, finacial markets traded a very limited number of securities. After the bubbles of 1719-1720, shares traded more like bonds than equities. Investors were more interested in getting a secure return on their money than investing for capital gains.

The second period from 1800 until 1914 was one of expanding equity markets, globalization of financial markets, and a reduction in the importance of government bonds relative to equities. This changed in the 1790s when first canals, and later railroads changed the nature of financial markets forever. Investors discovered that transportation stocks could provide reliable dividends as well as capital gains. For the next hundred years, investors had the opportunity to invest in thousands of companies that could generate capital gains as well as dividends. Financial markets became globalized and the transportation revolution enabled the global economy to grow. By 1914, capital flowed freely throughout Europe and the rest of the world, enabling investors to optimize returns globally.

The era of free trade came to an end on July 31, 1914 when the worlds stock markets closed down when World War I began. During the war, capital was directed toward paying for the war. Attempts to restore globalized financial markets after the war failed. Financial markets operated on a national level, not on an international level. Before World War I, markets provided similar returns because they were integrated. After the war, national equity market returns diverged because capital was unable to flow to the countries with the highest rates of return. After World War II, Europe nationalized many of its main industries and the United States regulated industries.

It wasnt until the 1980s that equity markets became globalized once again when deregulation and privatization swept over the worlds stock markets. The poor performance of markets and the economy in response to the OPEC Oil Crisis of the 1970s brought the role of government in regulating the economy into question. Privatization swept over the capitalist economies, and the former Communist countries opened stock markets and began to integrate with the worlds financial markets. The global market capitalization/GDP ratio increased dramatically.

How long the fourth era will last before we move into a fifth era will depend upon technology. The fifth financial era will begin when financial markets reach singularity, where the national markets in financial assets merge into one market and financial markets are not just global, but singular. All financial assets will trade 24 hours a day over computer networks that are connected to every corner of the globe. Markets have almost reached that point in the foreign exchange market, and it is only a matter of time before the market for financial assets reaches that point as well.

Given this, it is our prediction that the financial singularity will occur independently of efforts of existing exchanges to merge into a single market. We believe this will happen in the 2020s, but when and how, we do not know. But even when all this happens, and exchanges disappear, companies will still raise capital by issuing shares to the public, billions of people will still rely upon stocks for their investments, and we will still worry about whether the stock market will go up or go down tomorrow.

Bryan Taylor is Chief Economist at Global Financial Data