Changing Tides of American Business

Robots are a hot topic.  I recently read The Second Machine Age, which explores the amazing recent strides in automated machines and attempts to peer into the future and imagine life alongside robots and other emerging technologies.  We seem to be nearing an inflection point—something like Ray Kurzweil’s “singularity”—where technology growth is almost too fast to measure. Our world looks nothing like it was imagined in 2001: A Space Odyssey, but maybe Arthur C. Clarke was only a few decades off!  It’s crazy to think I may soon be able to ride to work in an automated car/hovercraft, grow replacement organs, and rely on robots to do almost ever menial task that collectively take up a huge chunk of my time.  Alongside these emerging technologies will be massive new companies, which got me thinking, how has the economic and market landscape changed in the last 50 years and how will it change in the next 50?

First I looked at the change in market share for U.S. companies in the 10 major economic sectors over the last 50 years; a lot has changed. In 1963, energy, material, industrial, and consumer stocks made up 83% of revenues for U.S. companies. In stark contrast, health care, financial, and information technology stocks made up just 7% of overall revenues. Fast forward to 2014, and revenues for the first group have fallen to 60%, while revenues for the second group have risen to 34%.

The story is even more extreme when you consider who is earning the profits.  In 1963, material, energy, industrial and consumer stocks earned 70% of overall profits, now they earn 44%.  In 1963, health care, financial, and technology stocks earned just 10% of the profits, now they earn 53%.

Within economic sectors, certain industries have thrived or sputtered. Here is a look at the biggest changes in sales and earnings share for industries between 1963 and 2013. Automobile and Material companies have lost market share, while software, hardware and financial companies have thrived. Some companies have lasted, but more have faded to make way for new titans like Apple.

So will the trend away from “old economy” sectors like materials and industrials continue in favor of health care, financials, and technology? In a perfect world, America would continue to lead the way in research because an emphasis on research and development would allow us to continue to lead in technology, health care, and finance. But jobs in these sectors require special skills, so education will be key for young workers. As Erik Brynjolfsson and Andrew McAfee, authors of The Second Machine Age, say in their book:

Rapid and accelerating digitization is likely to bring economic rather than environmental disruption, stemming from the fact that as computers get more powerful, companies have less need for some kinds of workers. Technological progress is going to leave behind some people, perhaps even a lot of people, as it races ahead. As we’ll demonstrate, there’s never been a better time to be a worker with special skills or the right education, because these people can use technology to create and capture value. However, there’s never been a worse time to be a worker with only ‘ordinary’ skills and abilities to offer, because computers, robots, and other digital technologies are acquiring these skills and abilities at an extraordinary rate.

Income inequality is already a huge and worsening issue around the world, but a further gap between skilled and unskilled workers would likely make that gap even worse. I believe that one of the healthiest antidotes to income inequality is investing in the global stock market. As I discuss in my forthcoming book, between 1974 and 2011, real income rose by a tiny 3.2 percent for the vast majority of Americans (bottom 99%) while real income grew by 154 percent for the top earning one percent of Americans.[i] If this trend continues, it could be a big problem for millennials. But during this same period between 1974 and 2011, when the bottom 99% barely earned a raise, the stock market grew by a real (after-inflation) 759 percent. Even small investments early in life can grow to considerable sums.

For investors, changes in technology will all be very exciting. But while new companies and new technologies will be great for our economy and for our quality of life, they may spell disaster for our portfolios. As the recent meteoric rise of fuel cell companies like Plug Power and Ballard Power Systems make clear, the market goes insane for new tech and is willing to pay up for shares of promising new companies.

Led by Tesla-mania, companies like Plug and Ballard are skyrocketing despite relatively modest sales. It’s easy to tell a great story about these stocks and make the case that their stocks will succeed, but each of these companies in the above chart are in the worst 10% of all companies by valuation.

Since 1963, this group of expensive stocks (the worst 10%) have yielded terrible returns for their investors. Stocks in general have grown by more than 11% per year[ii], but the 10% of stocks with the worst valuations have grown by just 1.5% per year[iii]. That’s worse than inflation. Plug and Ballard may be exciting, but investments in similarly valued companies have lost purchasing power over a 50 period.

Things have changed a lot in the last 50 years, but they will change must faster in the next 50.  For young people especially, education and specialized skills will be crucial. Investments in the global stock market will be a great way to participate in global growth and to hedge against the potential for worsening income inequality. But remember that when you make investments, a great company does not always mean a great stock. New technology stocks are often extremely overpriced, and should be avoided if they are expensive. In fact, since 1963, technology and health care stocks have been among the worst performers even as they have gained so much market share.  This has happened because investors tend to pay too much for them.

Our lives will improve and grow thanks to new technologies and advances in health care—I can’t wait for the robots, the new organs (I’m Irish), the nanotechnology, and God knows what else.  But for our portfolios, hot new companies will probably be too expensive to earn a nice return. Opt instead for rules based strategies/indexes that emphasize cheap valuation (“smart beta” is one popular term) and you’ll get the best of both worlds: improved quality of life, and strong portfolio growth.



[i] Data from Emmanuel Saez, available at under “Income and Wealth Inequality.”

[ii] All U.S. stocks with a market cap above an inflation adjusted $200MM, equally weighted

[iii] Value measured using a variety of measures like price-to-sales and price-to-earnings.