Spanish Stock Returns, Growth and Inflation, 1900-2020

This project studies equity returns in the Madrid Stock Exchange and their connections with the macroeconomy from the emergence of a stock market around 1900 to its “big bang” at the turn of the 21st century. Using high-quality data from primary sources and the methodology of the modern IBEX35 (published since 1987), we constructed an original index, the H-IBEX, for the period 1900-1987. With 120 years of monthly data, we empirically test the ability of stock prices to predict real economic activity, provide a detailed chronology of market cycles and analyze their time-varying characteristics across stages of market development and macroeconomic regimes. We also assess the role of Spanish equities as an inflation hedge and compare their long-run investment performance in an international perspective. Our data confirm that the Civil War (1936-39) had only a moderately negative impact on equity wealth compared to other economic disasters of the 20th century. In the long run Spanish equities underperformed most European markets due to a massive destruction of financial wealth in the stagflation of the 1970s-80 and the transition to an open economy after decades of protectionism. This was the true “rare disaster” suffered by Spanish investors in the 20th century.