The Make-Up of the US Equity Market Over the Past 200 Years

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The US equity market has changed dramatically over the past 200 years. In the early days of the founding of the equity market, financials particularly the banks were the only listed companies. Then in the early 19th century transportation stocks especially railroads were the dominant sector in the market. This was followed by energy and materials sector. Today the tech and communications sector is the largest sector accounting for about 30% of the market.

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Source: The Ruffer Review 2019,Ruffer LLC, UK

Price Changes in the US – Jan, 1997 to Dec, 2017

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Inflation is rising in the U.S. Last week we learned that inflation shot up to 4.2% in April, the highest since 2008. Inflation can be considered as the stealth tax since it sneaks up on people when most are not looking or paying attention – usually in small increments. Inflation also reduces the purchasing power of the dollar. Or to put it another the dollar’s worth or value declines.

Below is a chart from 2018 that shows the price changes of select consumer goods, services and wages in the US from Jan, 1997 to Dec, 2017:

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Source: AEI

All the things that are necessary for a decent life have become more expensive in the US. These are shelter, an education and health care. Everything else including junk food, tv, toys, gasoline, etc. are cheap.

Blue lines are prices that are subject to market forces while red lines denote prices subject to heavy regulatory capture by the government.

The Largest Companies By Market Value Change Over Time

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The top companies by market value change over time especially in a decade or sometimes even every year. As the saying goes, change is the only constant in equity markets. Accordingly investors have to calibrate their holdings and not become overconfident in holding the leadership positions by today’s market leaders. Just like a revolving door, scores of companies have attained top rankings only to lose it in the following years. During the dot com era, networking giant Cisco(CSCO) used to be one of the largest firms with an astonishing market capitalization. Then when the bubble  burst, Cisco lost that status and the stock went nowhere for many consecutive years. Even today, Cisco is a former shell of itself and is just another tech giant that lost it shine long time ago. Investors in Cisco stock at the height of the dot com boom, lost dearly over the years. On the other hand, investors that picked up stocks of the food supplier Sysco(SYY) instead reaped a huge gain during the same time period.

In the recent Berkshire Hathaway AGM Warren Buffett discussed how extraordinary things can happen in equity markets over 30 years. From an article by Emma Rapaport at Firstlinks, Australia:

Extraordinary things can happen

“I would like particularly new entrants to the stock market to ponder just a bit before they try and do 30 or 40 trades a day in order to profit from what looks like a very easy game.”

Buffett took time to remind people, particularly newer investors, of the extraordinary things can happen in stock markets. He included a list of the 20 largest companies in the world by stock market value on 31 March 2021. Apple was number one worth just over US$2 trillion with United Health at number 20, worth around US$330 billion.

Looking back at the top 20 from 1989, Buffett noted that none of the top 20 today appeared on the list 30 years ago. He said:

“None. Zero. There were then six US companies on the list and their names are familiar to you. We have General Electric, we have of Exxon, we have IBM Corp. None made it to the list 30 years later, it was zero.” 

Source: Berkshire Hathaway AGM, Bloomberg, EQS Function

Buffett then invited the audience to think about how many of the companies in the 2021 list will still be on the list in 30 years. He said:

“It’s not going to be all 20. It may not even be all 20 today or tomorrow. You’d think it could be repeated … Yeah, it seems impossible and maybe it is impossible, but we were just as sure of ourselves as investors and Wall Street was in 1989 as we are today, but the world can change in very, very dramatic ways.”

The lesson for investors is that the world will change in dramatic ways. Don’t get too sure of yourself.

Source: Buffett says stock picking is too hard for most investors, Firstlinks

Below is another chart from Research Affiliates showing the changing nature of the top firms by market capitalization in the world at the beginning of each year. In 1980 and 1990, IBM(IBM) was in the top 10 list but has now disappeared to turn into another average tech company surviving on its former glory Similarly in 1990, Japanese firms dominated the top 10 list and today none of them even appear in the ranking. Oil giant(XOM) is another former investor darling that has lost its coveted status.

Source: The Fall of the Titans!, Research Affiliates

Indeed, the top 10 stocks by market value change dramatically from one decade to another. As history shows, today’s leaders such as Apple(AAPL), Facebook(FB), Amazon(AMZN), etc. may not necessarily be the top company in the next decade.

Disclosure: No positions

Update (3/26/22):

1.The Top 10 Companies in the S&P 500 Index From 1980 To Current 2022):

Source: TFS Post

2.The Top 30 Stocks in the S&P 500 over the Past 30 Years:

Source: TFS Post

3.Ten largest market cap stocks in the world on Jan 1 of each year, 1980 to 2018:

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Source: Buy High and Sell Low with Index Funds!, Research Affiliates

Why Staying The Course Is Very Important

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One of the important traits of successful equity investors is the simple act of being patient with investments. To put it another way, building real wealth with stocks requires the ability to be calm when markets turn volatile and focus on the long-term goal. The age-old adage goes that time in the market is more important than timing the market.

In the past few months US markets have turned volatile and in the past three days major indices have declined significantly. Though it may be tempting to sell everything and then buy back later at cheaper prices, it is wise to stay strong and not sell out. This is because while selling is easy when markets fall buying back is difficult since no one knows when the markets will turn around. The dramatic decline and the sharp recovery in US equities early last year shows the importance of staying the course. The simple chart below vividly shows the astonishing difference in returns between staying invested and missing the five best days of the S&P 500:

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Source: Morningstar via Bourbon Financial Management

Related: ETF:

  • SPDR S&P 500 ETF Trust (SPY)

Disclosure: No Positions

IRA Contributions and Deductions Guide for Year 2021: Infographic

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The contribution limits for various retirement plan accounts such as Traditional IRA, Roth IRA, etc. for 2021 are shown in the infographic below. In addition, the chart also shows the rules for deductions. As the deadline for tax filing for tax year 2020 approaches soon, this guide is a useful tool to plan for this year.

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Source: Equity Trust