Time to read: 6 Minutes
The majority of the adults in the United States have money invested in the stock market. Whether it be indirectly, through things like retirement accounts and mutual funds or as individual investors who purchase and sell specific stocks, investment in the stock market is a key component of financial planning, retirement savings, and growing wealth.
The stock market is also the lifeblood of business growth and development – and has been for centuries. While the New York Stock Exchange wasn’t created until the 18th century, trading shares or ownership stakes in different companies is a tradition that dates back long before that.
In this column post, we’ll share a brief history of the stock market in the United States, explain the four stages that make up a stock market cycle, and explore whether or not the stock market really is always going up.
The Stock Market: A Brief History.
While the concept of the stock market dates back much further, May 17, 1792, when the Buttonwood Agreement was signed by 24 stockbrokers, is considered the official founding of the New York Stock Exchange, also known as the NYSE. The agreement created rules surrounding trades and commissions and helped to instill confidence in the general public.
By 1817, the stock market had grown large and active enough that The New York Stock & Exchange Board was created to provide important oversight and ensure that regulations were being upheld.
As the country continued to grow, so did businesses, and the securities trade at the NYSE expanded alongside them. States and municipalities used bonds to finance important infrastructure, while stocks enabled banks, insurance companies, and railroads to develop and expand.
In 1867, the stock ticker was introduced, which allowed information to easily be transmitted across the country, making it easier than ever for people all over the United States to participate in the stock market. This led to record growth that culminated in the market’s first million share day in 1886.
The market continued to grow, both physically and in the number of stocks traded until Tuesday, October 24, 1929 when the market experienced a shocking drop. Over 16,000,000 shares were traded in a single day – a record that wasn’t broken for 39 years – and this first significant market crash became the start of the Great Depression.
As the country recovered, reforms were created, one of which was the creation of the Securities and Exchange Commission by Congress in 1934.
Post World War II, the market fully recovered and over the next several decades, stock ownership rose, enabled largely by the rapid integration of technology. 1971, the stock exchange began on the National Association of Security Dealers and Automated Quotations, more commonly referred to as NASDAQ. NASDAQ allowed, and continues to allow, investors to buy and sell stocks online, rather than in-person, broadening access to the stock market.
Just as technology enabled growth in the past, the stock market continued trending upward. In 1980, the market capitalization of the companies listed on the NYSE surpassed $1 trillion for the first time.
However, seven years later, on a day known as Black Monday, the market had one of its most dramatic falls in history and the Dow Jones lost 22% of its value. Just like after the 1929 crash, the following months were filled with changes designed to make prices less volatile and procedures more streamlined.
As new technology was implemented, the volume of the stock market increased and in October of 1997, the NYSE experienced its first one billion share day.
2008 saw the next substantial market crash when the booming housing market burst, making it the third largest crash in the market’s history. However, by the end of 2009, the market had largely recovered and continued to experience positive growth for the next decade, with the next significant decline taking place in 2022, after which the market had two years of significant positive growth..
Stock Market Cycles.
If this stock market history tells us one thing, it’s that the stock market never stays still for long. In fact, minimal fluctuations on any given day are expected and normal.
It’s not just minimal fluctuations that are normal, either. Historically, the stock market has gone through four stages where it expands and shrinks over the course of weeks or even years.
In the first stage, accumulation, stock prices are comparatively low, and investors try to capitalize on the discounted prices by buying large amounts of stocks. This inevitably leads to markup – the second stage of the cycle. In response to demand, the prices of stocks rise.
Next comes distribution, where many investors start selling their portions, often leading to a temporary jump in prices – but this stage leads to the fourth and final stage of the stock market cycle: markdown, also known as the decline. As more investors sell, prices begin to fall, leading to additional investors to worry about the value of their portfolios and deciding to sell, and prices drop lower yet again.
Of course, once the prices are sufficiently low, investors start to capitalize by making new purchases – and the accumulation stage begins again.
Is the Market Really Always Going Up?
It’s a popular saying, but when we hear about market fluctuations, it’s natural to wonder what people mean when they say the market is always going up – and if it’s an accurate statement.
The truth is, on any given day, the stock market could be up – but it could also be down. Regular stock market cycles make downward trends just as inevitable as the upward swings.
However, when you look at the big picture, the stock market historically shows long-term upward trends, even if the growth doesn’t follow a consistent path. In fact, the average stock market return is 10% annually in the United States.
Some years, like 2023, have ended with much higher returns, while other years, like 2008, ended with significant negative growth. Year to year, the market could be up or down – but when the numbers are averaged, the data shows that, overall, the stock market continues to grow.
For investors who hold stocks for a long time, this is great news. While there may be short term losses in times of negative growth, those who hold onto their stocks and wait out fluctuations tend to benefit from overall upward trends.
Nobody can accurately predict how the stock market will fluctuate on any given day, week or year, but the historic patterns of the stock market are often a great indicator of how it will continue to develop long term.
Sources
https://www.sofi.com/learn/content/average-stock-market-return/
https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
https://www.nyse.com/history-of-nyse
https://www.sofi.com/learn/content/history-of-the-stock-market/.
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