While there are numerous fascinating observations – we encourage readers to peruse the full presentation at their leisure – below we present three charts highlighting the dramatic transformation of the US stock market starting in 1899 and continuing through today, showcasing its relative domination of all global equity markets, the relative sizes of world markets, and how significantly the equity composition has changed over the past 117 years.
At the beginning of 1900 – the start date of our global returns database – virtually no one had driven a car, made a phone call, used an electric light, heard recorded music, or seen a movie; no one had flown in an aircraft, listened to the radio, watched TV, used a computer, sent an email, or used a smartphone. There were no x-rays, body scans, DNA tests, or transplants, and no one had taken an antibiotic; as a result, many would die young.
Mankind has enjoyed a wave of transformative innovation dating from the Industrial Revolution, continuing through the Golden Age of Invention in the late 19th century, and extending into today’s information revolution. This has given rise to entire new industries: electricity and power generation, automobiles, aerospace, airlines, telecommunications, oil and gas, pharmaceuticals and biotechnology, computers, information technology, and media and entertainment. Meanwhile, makers of horse-drawn carriages and wagons, canal boats, steam locomotives, candles, and matches have seen their industries decline. There have been profound changes in what is produced, how it is made, and the way in which people live and work.
These changes can be seen in the shifting composition of the firms listed on world stock markets. Chart 2 shows the industrial composition of listed companies in the USA and the UK. The upper two pie charts show the position at the beginning of 1900, while the lower two show the beginning of 2017. Markets at the start of the 20th century were dominated by railroads, which accounted for 63% of US stock market value and almost 50% of UK value. More than a century later, railroads declined almost to the point of stock market extinction, representing less than 1% of the US market and close to zero in the UK market.
Of the US firms listed in 1900, more than 80% of their value was in industries that are today small or extinct; the UK figure is 65%. Besides railroads, other industries that have declined precipitously are textiles, iron, coal, and steel. These industries still exist, but have moved to lower-cost locations in the emerging world. Yet similarities between 1900 and 2017 are also apparent. The banking and insurance industries continue to be important. Similarly, such industries as food, beverages (including alcohol), tobacco, and utilities were present in 1900 just as they are today. And, in the UK, quoted mining companies were important in 1900 just as they are in London today.
But even industries that initially seem similar have often altered radically. For example, compare telegraphy in 1900 with smartphones in 2016. Both were high-tech at the time. Or contrast other transport in 1900 – shipping lines, trams, and docks – with their modern counterparts, airlines, buses, and trucking. Similarly, within industrials, the 1900 list of companies includes the world’s then-largest candle maker and the world’s largest manufacturer of matches.
Another statistic that stands out from Chart 2 is the high proportion of today’s companies that come from industries that were small or non-existent in 1900, 62% by value for the USA and 47% for the UK. The largest industries in 2017 are technology (in the USA, but not the UK), oil and gas, banking, healthcare, the catch-all group of other industrials, mining (for the UK, but not the USA), telecommunications, insurance, and retail. Of these, oil and gas, technology, and healthcare (including pharmaceuticals and biotechnology) were almost totally absent in 1900. Telecoms and media, at least as we know them now, are also new industries.
Our analysis relates only to exchange-listed businesses. Some industries existed throughout the period, but were not always listed. For example, there were many retailers in 1900, but apart from the major department stores, these were often small, local outlets rather than national and global retail chains like Walmart or Tesco. Similarly, in 1900, a higher proportion of manufacturing firms were family owned and unlisted. In the UK and other countries, nationalization has also caused entire industries – railroads, utilities, telecoms, steel, airlines, and airports – to be delisted, often to be re-privatized at a later date. We included listed railroads, for example, while omitting highways that remain largely state-owned. The evolving composition of the corporate sector highlights the importance of avoiding survivorship bias within a stock market index, as well as across indexes.
In the 2015 Yearbook, we looked at long-run industry returns in the USA and UK since 1900, and asked whether investors should focus on new industries and shun the old, declining sectors. We showed that both new and old industries can reward as well as disappoint. It all depends on whether stock prices correctly embed expectations. For example, we noted above that, in stock market terms, railroads were the ultimate declining industry in the USA in the period since 1900. Yet, over the last 117 years, railroad stocks have beaten the US market, and outperformed both trucking stocks and airlines since these industries emerged in the 1920s and 1930s. Indeed, the research in the 2015 Yearbook indicated that, if anything, investors may have placed too high an initial value on new technologies, overvaluing the new, and undervaluing the old. We showed that an industry value rotation strategy helped lean against this tendency, and historically had generated superior returns.
Finally, a self-explanatory chart of the evolution of equity markets, and how the US has dominated throughout the past 117 years: