If you could travel back in time to the 19th century, it would be very difficult to convince anyone that railroad investments were not the future of the stock market.
Governments were offering subsidies and land grants to stimulate rapid industry growth – and in the period of 1868-1873, just after the American Civil War, an astonishing 33,000 miles of new railroad track were laid.
Entrepreneurs and financiers started betting on ambitious enterprises like the Northern Pacific Railway – and as the transportation boom raged on, more than 60% of total U.S. stock market capitalization came from railroad related stocks.
20/20 HINDSIGHT
We know today that the railroad boom didn’t live up to the expectations drawn out by speculators.
The valuations of all of those rail companies seem pretty absurd in hindsight, especially when looking at this week’s Chart of the Week on U.S. stock market history. It pulls numbers from Global Financial Data to contrast the relative sector weightings over 200 years.
While there are some obvious historical moments to be discovered on the chart, perhaps the most important lesson it demonstrates is the unpredictability of the market in general.
This is a reminder of why stock markets provide both risk and reward – as the speculators from 1869 found out, nobody knows for sure what the future holds.
HOW SECTOR COMPOSITION HAS CHANGED
When stock market indices were introduced in the 1800s, only two types of equities were tracked: railroads and industrials.
Even by the year 1900, markets were much more complex – while railroads were still a dominant force, investors were starting to put money into other types of companies like utilities, steel, and energy companies.
Here’s a look at the share of market capitalization of the U.S. stock market in both 1900 and 2018:
| Sector | U.S. Stock Market (1900 share) | U.S. Stock Market (2018 share) |
|---|---|---|
| Finance | 20% | 19% |
| Transports | 38% | 2% |
| Utilities | 6% | 3% |
| Consumer Discretionary | 4% | 10% |
| Real Estate | 1% | 3% |
| Industrials | 5% | 8% |
| Materials | 8% | 5% |
| Consumer Staples | 5% | 8% |
| Energy | 8% | 7% |
| Communications | 5% | 14% |
| Information Tech | 0% | 12% |
| Health Care | 0% | 9% |
As of 2018, the market is more varied than it’s ever been.
Information tech, communications, and healthcare stocks, which did not really exist at the turn of the 20th century, are now many of America’s biggest companies. The transition is incredible to look at in retrospect, and makes us wonder what the market will look like 100 years from now.