Mark Perry finds an article by Richard Foster, who wrote,
US corporations in the S&P500 in 1958 remained in the index for an average of 61 years. By 1980, the average tenure of an S&P500 firm was 25 years, and by 2011 that average shortened to 18 years based on seven year rolling averages. In other words, the churn rate of companies in the S&P500 has been accelerating over time
It seems to me that this is just one of many important structural changes that have taken place in the U.S. economy since 1960. It seems very unlikely that the same macroeconomic behavior would be observed today as was observed in past decades when the labor force had different education levels and a different gender mix, when corporate turnover was lower, when we lacked computers for inventory management, when there were restrictions on interstate banking, and so on.
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On the bright side, there is robotics. On the other hand, we have the grey goo to look forward to.
Or when the actual ownership of physical capital mattered more. It’s much more profitable to own a freight broker than own a fleet of planes or trucks.
Hmm…so what are the implications of this for investors? Weight your portfolio away from large cap stocks and more towards mid and small cap stocks?
Interesting fact. Some thoughts:
– Always remember that the economy is not just public firms. It is interesting that firms aren’t staying on the S&P 500 list for as long as they used to. This tells us something about ownership behavior and maybe a few other things, but it doesn’t tell us about birth and death of firms. Until a few years ago, a lot of economists made the mistake of drawing inference from the behavior of public firms only. But it turns out that these firms are different: http://www.nber.org/chapters/c11178
– Birth and death of firms, along with other measures of churn, has actually been in secular decline for many decades. This is definitely the case among non-public firms; until the early 2000s. It is less true for public firms.
– I wonder how much of the decline is driven by the tech boom/bust alone. I also wonder how much of it is a composition effect–eg, suppose tech firms have ALWAYS had higher index churn. As they occupy a larger portion of the index, the overall index will have higher churn–but the story is still just about industry composition rather than within-firm or within-industry changes. I’m not saying this is the case, but it’s the first place we should look.
The chart of chart of Health Care, XLV, and Biotechnology, XBI, compared with the S&P 500, SPY, http://tinyurl.com/kdno34l communicates to me that investors seeking investment gain have called for Health Care Companies to have greater contribution to society and these companies have caused super churn to come to the S&P 500. Of note it is the Consumer Discretionary, XLY, and especially the Retail, XRT, that are at the lead turning the S&P 500 lower.
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