Americans have been trading stocks for over 200 years, but the composition of the stock market has shifted as innovation creates new industries and renders others irrelevant.
Credit Suisse’s recent “Global Investment Returns Yearbook 2017” provides an interesting snapshot of just how much the US market has transformed since 1900.
As you can see, railroads dominated the US stock market at the beginning of the 20th century. That’s because, at the time, most people had not even seen the inside of an automobile. But, as the Library of Congress (LOC) notes, most of America’s rail system was in place by 1900. The nation’s railways led to the development of new towns and settlement of the West. They “generally tied the country together,” the LOC notes.
These days, however, railroads have declined almost to “the point of market extinction,” according to the Credit Suisse report by London Business School Professor Elroy Dimson and team.
That’s because, later in the 20th century, people commuting short distances started opting to take cars instead of trains. Meanwhile, the US government spent billions constructing interstate highways and inland waterway systems, as the Association of American Railroads noted in a history of freight railroads. That opened up increased freight competition from barges and trucks.
Rail is far from the only industry to go out of fashion in the past 117 years, though. Of the US firms listed in 1900, more than 80% of their value was tied to industries that have either shrunk or disappeared completely. Those industries include textiles, iron, coal, and steel, whose production has shifted from the US to lower-cost locations.
Meanwhile, the Credit Suisse report notes, “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.” That innovation has generated entirely new industries including oil and gas, automobiles, aerospace, pharmaceuticals, computers, and many others that weren’t part of life back in 1900.
However, some similarities remain between the stock market now and back in 1900. The FTSE 250 index shows that mining companies in the UK continue to make up six of the top 10 performers, signifying the industry is as relevant as it was in 1900. Similarly, sectors like banks and insurance are still stable markets. Other industries have simply shifted as the information revolution advanced; for example, telegraphy has fallen out of favor while smartphones were booming in 2016. “Both were high-tech at the time,” the Credit Suisse report noted.
This changing composition of the markets shows that sectors that are worth investing in today can be vastly different decades from now. Moreover, markets that can be huge today may be less relevant in the decades to come, as these charts show.
In 1899, the UK equity market was by far the largest in the world — at 25%, followed by the US at 15% and Germany at 13%. In the 1980s, the stock power shifted to Japan for a brief moment where the country dominated 45% of the global total, with the US trailing far behind at 30%. Today, the US market holds a total of 52.3% of the stock market; no other markets are within sight.
“This reflects the superior performance of the US economy, the large volume of IPOs, and the substantial returns from US stocks. No other market can rival this long-term accomplishment,” Credit Suisse wrote.
Will the US continue to dominate the global stock market in 2100? Possibly. However, one thing is certain; the industries that are most prominent today may disappear a 100 years from now.
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