This week is a great reminder that the markets are not static. They evolve and change based on the economy, demographics, trends and even a global pandemic. So why do we torture ourselves comparing today’s markets using crude valuation metrics to markets decades, or even centuries past?
Analysts talk about the S&P 500 as if it is something unto itself. The composition changes over time as companies enter, exit, merge and go bankrupt. Ben Carlson at A Wealth of Common Sense has a great post up showing the changes in the index based on the growing importance of technology stocks, broadly defined. He writes:
Technology has taken energy’s place at the top of the heap as the largest sector, with a 24% weight. And that weighting is likely understated. For instance, the six biggest companies in the S&P 500 are all what most people would consider tech stocks or at least tech-adjacent companies—Apple, Microsoft, Amazon, Google, Tesla, and Facebook. Collectively, these six stocks are worth around $8 trillion.
This isn’t just a U.S. situation. You hear analysts talk about the ’emerging markets.’ As is the case with the S&P 500, the emerging markets today look very different than they did 10 or 20 years ago. The chart below shows the changing country composition of the MSCI Emerging Markets Index.
The nature of the emerging markets may have remained stable, which is debatable, but the actual composition has changed a great deal over time. As Ben Johnson at Morningstar noted:
Emerging markets are dynamic by definition. The makeup of this group will continue to evolve as these nations continue to either climb or fall off the economic development ladder.
The two previous examples are understandably dynamic. What about a brick of gold? The gold itself hasn’t changed since the time humans started digging it out of the ground, but how it is traded has changed. A 2020 paper, Gold, the Golden Constant and Deja Vu by Erb, Harvey and Viskanta, showed that the price of gold is now influenced by flows in and out of the big exchange traded funds. What used to require a trip to a bank vault or safe now can be executed in a manner of seconds and in size.
Like everything else in this world, markets evolve over time, sometimes dramatically. Human behavior (largely) hasn’t. But don’t let that lull you into thinking that an index that once was filled with sugar, tobacco and coal companies tells us much about what is happening in an Internet-enabled economy.