A History Of The US Stock Market From 1899 To 2017 In Three Charts

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Tyler Durden's picture

This year’s edition of the Credit Suisse Global Investment Returns Yearbook is out, and as every other year, it remains full of curious and interesting trivia about the market’s composition and return performance over the past year.

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.

Some brief observations from Credit Suisse:

Early in the 20th century, the US equity market overtook the UK and has since then been the world’s dominant stock market, although at the end of the 1980s Japan was very briefly the world’s largest market. At its peak, at start-1990, Japan accounted for almost 45% of the world index, compared with around 30% for the USA. Subsequently, as the right panel of Chart 1 attests, Japan’s weighting fell to just 8.4%, reflecting its extremely poor stock market performance since then. Our 23 countries accounted for 98% of world equity market capitalization at the start of 1900, and today they still represent some 91% of the investable universe.

Some thoughts on the market’s “Great Transformation” from Credit Suisse:

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:

Full presentation below:

US equities were volatile with large real drawdowns
-80%-70%-60%-50%-40%-30%-20%-10%0%
But bonds have also had large drawdowns in real termsDiversification across asset classes helps to reduce risk
-80%-70%-60%-50%-40%-30%-20%-10%0%
-80%-70%-60%-50%-40%-30%-20%-10%0%
 Bonds Equities
-80%-70%-60%-50%-40%-30%-20%-10%0%
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists, Princeton University Press, 2002, and subsequent research
8
But long rates still low. So short rates likely to remain lowReal (after inflation) returns on long bonds still very low
-101234SwiGerNetSweBelFraFinAutDenIreSpaItaJapPorUKUSCanNorAus 3-months 10 years 20 years
In 2016 rates hit all-time low
-101234SwiGerNetSweBelFraFinAutDenIreJapSpaItaPorUKUSCanNorAus 3-months 10 years 20 years
The present: Yields on sovereign bills and bonds (%)
Since the 2016 low, rates have risen
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists, Princeton University Press, 2002, and subsequent research
9
The race to zero and beyond? Is it over?
-2-101234000102030405060708091011121314151617 US UK Fra Ger Jap Can Swe AverageReal yield for representative 10-year index-linked bond
No need to extrapolate past returns. Just look at current yieldsReal yields still negative or close to zero. Slight upturn recently
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists, Princeton University Press, 2002, and subsequent research
10
Real interest rates impact subsequent real equity and bond returns
Low real interest rates means a low return world
 
5.4
 
1.4
 
4.2
 
5.2
 
5.2
 
7.6
 
9.0
 
11.0
 
 
10.0
 
 
3.4
 
2.2
 
4.0
 
5.6
 
9.8
 
 
11
 
 
2.2
 
0.1
 
1.4
 
2.8
 
4.6
 
9.4
 
-15
 
-10
 
-5
 
0
 
5
 
10
 
Low 5%
 
Next 15%
 
Next 15%
 
Next 15%
 
Next 15%
 
Next 15%
 
Next 15%
 
Top 5%
 
Equities next 5 years % p.a.
 
Bonds next 5 years % p.a.
 
Real interest rate boundary %
 
Percentiles of real interest rates across 2,317 country
 
 
years
 
Real rate of return (%)
 
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists, Princeton University Press, 2002, and subsequent research
11
Many investors are anticipating a return to “normal”
 
1.94.505101520 Long-run average
The high bond returns
since 1980 were not “normal”
300 years of UK bond yields. What yield is “normal”?
 
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists, Princeton University Press, 2002, and subsequent research
12
Many investors are anticipating a return to “normal”
 
What real rate of interest is “normal”?
 
0.72.2-1.60.90.43.9-1.71.2-0.93.1-0.70.1-0.63.2-0.50.3-4-2024 USA UK Europe All Yearbook Average annual % real interest rate (short-term interest rate minus inflation)1900
19801981
20082009
2016 Allyears
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists, Princeton University Press, 2002, and subsequent research
13
Inflation on the rise? Equities, bonds and inflation
Equities best during low inflation. Bonds better in deflation.Higher inflation harms bonds
 but it also harms equities.
19.18.05.34.22.6-4.5-22.712.212.010.910.97.15.92.0-11.6
-3.5
0.41.72.74.27.719
-30-20-1001020Low 5%Next 15%Next 15%Next 15%Next 15%Next 15%Next 15%Top 5% Real bond returns (%) Real equity returns (%) Inflation rate boundary (%)Percentiles of inflation across 2,453 country-years; bond and equity returns in same year Rate of return/inflation (%)
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists, Princeton University Press, 2002, and subsequent research
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