A Re-Examination of Stock Market Returns from 1871-1897: Did Cowles Get It Right?

Abstract

Siegel (2014), Shilling (2015) and others rely on the work of Alfred C. Cowles to capture US stock market returns before 1926. Cowles in turn relied on Frederick Macaulay’s work for data on railroad stocks during this era. This study attempts to re-construct Cowles’ index from the ground up, by revisiting his sources and compiling anew the trade price, dividends, and capitalization of the individual stocks that make up Cowles’ index. I pursued two questions: did Cowles exclude any substantial number of stocks, such that their inclusion would change his estimates of market return? Second, do Cowles’ many adjustments for capital changes, such as rights issues, check out? I succeeded in reconstructing the railroad stock returns obtained by Cowles from Macaulay, and partially succeeded in reconstructing the utility and industrial stock returns estimated by Cowles himself. But I also found numerous excluded railroads, and an assortment of errors made by Cowles and Macaulay. I also found a set of industrial firms excluded because of judgment calls that Cowles made. Net of additions and corrections, I conclude that Cowles slightly over-estimated stock market returns in the period from 1871 to 1897. The effect is to reinforce the findings in McQuarrie (2019a): contra Siegel, stocks did not out-perform bonds during the 19th century. [This paper has been incorporated into subsequent work with some changes in the reported results; see revision notes that follow this Abstract.]

Keywords: 19th century stock returns, stock and bond comparison, railroads, panic of 1873, panic of 1893

JEL Classification: E31, E32, G12, N11