Through the lens of time – the changing face of the US stock market

Through the lens of time – the changing face of the US stock market

By Scott Ingham, Investment Director at Heartwood Investment Management, the asset management arm of Handelsbanken in the UK

As a nation develops, its stock market typically comes to reflect new trends and priorities, both social and technological. The world’s most dominant stock market – the US – offers a fascinating walk through stock market history.  

A wild ride from railroads to raw materials

When we talk about the US stock market, we are usually referring to the shares of companies listed on major exchanges like the New York Stock Exchange (NYSE). Loosely begun in the late 1700s and formalised in the early 1800s, the NYSE today remains the largest and most powerful stock exchange in the world. In its infancy, trading on the exchange was limited to just a handful of banking and insurance companies, but this uncontested financial sector dominance did not last for long. Shares in transport companies soon became a major contender to the throne as the railroad boom took off in the first half of the 19th century, boosted by government subsidies and the exuberance of speculators. In connecting the country, the infrastructure network created by the railroad boom also unlocked the economic potential of the inland US states, and allowed both goods and people to move around this massive landscape with relative ease for the first time. It enabled the simpler movement of oil and coal too, fuelling industry and growth, and facilitated the unrolling of the telegraph network which would revolutionise communication systems in the US.

At their peak in the late 1800s, railroad stocks accounted for well over half of the US stock market. But after a century of spreading its rails across the nation, the supremacy of the transport sector began to ease off. From around the time of the first world war until the 1980s, the energy and materials sectors grew in prominence instead. This reflected a heightened demand for the inputs of production (i.e. fuel and raw materials) in an increasingly industrialised marketplace dominated by consumers hungry for advances in living standards and seeking new goods from automobiles to home appliances. 

The ups and downs of the high-tech era

In the 1980s, though, the stock market landscape changed again. Bell System – which had all but monopolised the US telephone service up until this point – was broken up, leading to an influx of innovative new market entrants. These newcomers promptly began laying out fibre optic cabling across the country, paving the way for the tech and internet boom which would follow in the 1990s. In a neat full circle, this new network was laid along many of the same railroad lines which had fuelled the stock market’s first innovation-based boom.

A subsequent infatuation with technology stocks would soon create problems for the US market, resulting in the now infamous ‘dotcom bubble’ around the turn of the millennium. Driven by wild speculation, a rapid surge in the value of tech shares came to a head in 2000, leading to a colossal crash which wiped out the sector. Today, tech shares have regained much of their former popularity, and indeed tech companies have often driven US stock market performance in recent years. But while memories of the ‘dotcom bubble’ at the turn of the millennium may still be fresh in the minds of some investors, and investor caution is generally to be encouraged, the tech sector’s post-2000 rise has been more gradual.  

The tech sector was dominated by hardware businesses in the dotcom era, but technology businesses are far from an homogenous group in 2019. Today, the tech sector boasts a diverse range of businesses from cloud computing to nanotechnology, and these businesses are also (broadly) more profitable than their 1990s counterparts. The telecommunications sector – formerly the smallest segment of the stock market – was also given a rapid tech boost in 2018 when it was transformed into the broader ‘communications’ sector to reflect the evolution of the media and communications industries. Transfers to this newly-minted sector included industry giants like Alphabet (Google’s holding company), Facebook, Netflix and Twitter.  

What drives stock market changes?

Stock markets walk hand-in-hand with the economic development of a nation. From the beginning of its tenure to the present day, the US stock market is virtually unrecognisable. While financial shares still play a significant (if vastly reduced) role, railroad shares are few and far between. Shares in the once unheard of ‘communications’ and ‘information technology’ sectors together account for around a quarter of the US stock market, while shares in consumer goods businesses – both ‘staples’ (essential) and ‘discretionary’ (optional) – now equate to around a fifth of the market in combination, and healthcare shares equal almost a tenth.

The shifting balance of power between sectors and businesses is a largely natural process, reflecting a whole host of trends from societal demands to industrial developments and technological innovation. Changing consumer needs and demands have a crucial role in this process, such as a growing demand for luxury consumer goods and a pick-up in healthcare expectations as an economy develops. Meanwhile, disruptive technologies create pressure points that are clearly visible throughout stock market history. Today, we generally think of technology in electronic and digital terms, but the disruptive innovations of the past have ranged from steam engines to automatic weaponry, and from canal building to nuclear fission.

Disruption is painful as well as productive: some businesses can adapt well to a changing landscape, but for every Microsoft (which popularised home computing in the 1980s and remains one of the world’s most powerful tech companies today) there is a Kodak (the photographic specialist which famously missed the boat on the digital revolution). These shifting sands are fascinating to observe, and for investors able to back the right trends, they can lead to attractive returns. Only time will tell what will dominate the US stock market in 2118… perhaps flying cars and robotics?  

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