What has been the historical market cap weight of total US stock vs world?

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withrye
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What has been the historical market cap weight of total US stock vs world?

Post by withrye »

Forgive me if this is a simple question, but I haven't been able to find a clear table or chart for this. I know that right now the market cap of Total US stock is roughly 57% of the global stock market cap, because that's what VTWAX shows. But what has it been over the past 50-100 years?

I ask because I am tinkering with the idea of a "lazy tax-efficient" version of the one-fund portfolio based on Vanguard LifeStrategy Moderate Growth. That fund holds a 60/40 stock/bond allocation, and holds its stock similar to the prevailing US/Int market cap split.

My "lazy tax-efficient" approach would introduce a little more complexity in the form of a second fund, but would dramatically decrease the tax cost in taxable in my high bracket by using Vanguard Tax-Managed Balanced (VTMFX). The principle downside to VTMFX in my eyes is the total lack of international stock. By holding a 2:1 ratio of VTMFX and Vanguard Total International Stock (VTIAX), I end up with a portfolio that's 67/33 stock/bond and 50/50 US/Int.

On the first count, a 67/33 allocation is close enough to the 60/40 of LifeStrategy Moderate Growth that I'd find it acceptable.

On the second count, a 50/50 allocation between US/Int is currently acceptable given the current market cap weight of each. I believe a fund like VTWAX would "go wherever the wind blows" over the next several decades, whether that means a 70/30 split in favor of US/Int or vice versa (or anything else). With my "lazy tax-efficient" approach of 2:1 VTMFX:VTIAX, I would have no such flexibility.

Thus the question regarding the historical market cap weight of total US stock vs world. I want to know how far my 50/50 US/Int allocation would have been relative to other historical time points (the last 50-100 years would suffice).

I will consider my other concerns regarding VTMFX (munis rather than total bond and Russell 1000 rather than total US stock) separately, but if you have thoughts on those points feel free to share them.
asif408
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Re: What has been the historical market cap weight of total US stock vs world?

Post by asif408 »

https://i.insider.com/51156986ecad04e86 ... ?width=960

It's been as high as 70% in the late 1960s and as low as 25% in the first few decades of the 20th century and 1990. Certainly now it is on the higher end of its historical average since 1900.
Last edited by asif408 on Tue Jun 15, 2021 9:34 am, edited 2 times in total.
NiceUnparticularMan
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Re: What has been the historical market cap weight of total US stock vs world?

Post by NiceUnparticularMan »

Same chart through end of 2017:

Image
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withrye
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Re: What has been the historical market cap weight of total US stock vs world?

Post by withrye »

NiceUnparticularMan wrote: Tue Jun 15, 2021 9:30 am Same chart through end of 2017:

Image
asif408 wrote: Tue Jun 15, 2021 9:26 am https://i.insider.com/51156986ecad04e86 ... ?width=960

It's been as high as 70% in the late 1960s and as low as 25% in the first few decades of the 20th century and 1990. Certainly now it is on the higher end of its historical average since 1900.
Thank you both! I think a modest home-country bias in equity holdings is acceptable, but if I found myself with 50% US in an era where its market cap was closer to 25% I wouldn't be thrilled.
asif408
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Re: What has been the historical market cap weight of total US stock vs world?

Post by asif408 »

withrye wrote: Wed Jun 16, 2021 8:50 am Thank you both! I think a modest home-country bias in equity holdings is acceptable, but if I found myself with 50% US in an era where its market cap was closer to 25% I wouldn't be thrilled.
Why is that?
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withrye
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Re: What has been the historical market cap weight of total US stock vs world?

Post by withrye »

asif408 wrote: Wed Jun 16, 2021 10:27 am
withrye wrote: Wed Jun 16, 2021 8:50 am Thank you both! I think a modest home-country bias in equity holdings is acceptable, but if I found myself with 50% US in an era where its market cap was closer to 25% I wouldn't be thrilled.
Why is that?
One of my goals when investing is to hold market-cap-weighted equities through indexed instruments, including within the US and globally. If I lived in the UK or Japan, I could tolerate a modest home-country bias but I don't see a reason to hold twice the market cap. The situation is the same for being in the US. If US global market share were to fall to 25%, it'd presumably reflect some fundamental changes in the global financial marketplace and I'd want my portfolio to broadly reflect that.
asif408
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Re: What has been the historical market cap weight of total US stock vs world?

Post by asif408 »

withrye wrote: Wed Jun 16, 2021 10:40 am
asif408 wrote: Wed Jun 16, 2021 10:27 am
withrye wrote: Wed Jun 16, 2021 8:50 am Thank you both! I think a modest home-country bias in equity holdings is acceptable, but if I found myself with 50% US in an era where its market cap was closer to 25% I wouldn't be thrilled.
Why is that?
One of my goals when investing is to hold market-cap-weighted equities through indexed instruments, including within the US and globally. If I lived in the UK or Japan, I could tolerate a modest home-country bias but I don't see a reason to hold twice the market cap. The situation is the same for being in the US. If US global market share were to fall to 25%, it'd presumably reflect some fundamental changes in the global financial marketplace and I'd want my portfolio to broadly reflect that.
The only correlation I can see from this chart between market cap and country weighting is that those countries with higher market caps have stock markets that have previously outperformed those of the other countries. The most dramatic example of that is Japan, for instance. It outperformed the US market for 4 straight decades from 1950-1990, and went from just a few percent of world market cap to, at one point in late 1989 or 1990, around 40%, and briefly exceeded that of the US. It certainly was not a fundamental change in the Japanese stock market relative to the US market but more an example of how far valuations can get stretched.

If I was going to use global market cap to influence a particular country bias I would not use it to justify a home country bias based on a larger global market cap. I would use it to rebalance away from the countries that have increased they market cap relative to other countries, and the more dramatically they have increased the more I would rebalance away from that particular country. Otherwise you end up with the countries that have previously had the best stock returns and have the lowest forward looking returns.

Using your logic, in 1900 you could justify a larger UK and German equity bias, in the 1950s and 1960s (and today) you could justify a larger US equity bias, and in the late 1980s you could have justified a larger Japan bias. In none of those instances does it appear an investor with a 20-30 year or more time horizon would have been better served overweighting those markets, and in a number of cases it really would have hurt you quite a bit. In pretty much every situation looking forward 20-30 years or more most of those markets with the largest world market cap shrunk, indicating underperformance relative to one or more other countries. If I take anything away from this chart, it would be to avoid putting all your eggs in one country's basket, especially the one who has increased their world market cap the most.
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Re: What has been the historical market cap weight of total US stock vs world?

Post by jtdavid »

Use a more conservative fund in your IRA (LifeStrategy Conservative) and Total World Stock Index in your taxable account.
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Re: What has been the historical market cap weight of total US stock vs world?

Post by nisiprius »

NiceUnparticularMan wrote: Tue Jun 15, 2021 9:30 am Same chart through end of 2017:

Image
The thing I take from this--yeah, confirmation bias--is that pattern of US share from, say, 1930 to the present is best described simply as "fluctuation."

And that we should not put much trust in vague throwaway statements like "the US share of the global stock market is decreasing."

Admittedly I haven't been hearing that so much lately! I think it was circa 2010 that someone in the forum seriously disputed a throwaway comment of mine. I had said that the change in Burton Malkiel's recommendations from 1990 over that time frame (within stocks, he had started by recommending ⅙ international, and gradually raised it to ½ international) couldn't be justified simply as a response to declining US market share, because the US share in 1990 was lower than in 2010. They didn't believe it at first; hopefully they did after I produced a similar chart from Vanguard.
Last edited by nisiprius on Wed Jun 16, 2021 12:53 pm, edited 1 time in total.
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Topic Author
withrye
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Re: What has been the historical market cap weight of total US stock vs world?

Post by withrye »

asif408 wrote: Wed Jun 16, 2021 11:00 am
withrye wrote: Wed Jun 16, 2021 10:40 am
asif408 wrote: Wed Jun 16, 2021 10:27 am
withrye wrote: Wed Jun 16, 2021 8:50 am Thank you both! I think a modest home-country bias in equity holdings is acceptable, but if I found myself with 50% US in an era where its market cap was closer to 25% I wouldn't be thrilled.
Why is that?
One of my goals when investing is to hold market-cap-weighted equities through indexed instruments, including within the US and globally. If I lived in the UK or Japan, I could tolerate a modest home-country bias but I don't see a reason to hold twice the market cap. The situation is the same for being in the US. If US global market share were to fall to 25%, it'd presumably reflect some fundamental changes in the global financial marketplace and I'd want my portfolio to broadly reflect that.
The only correlation I can see from this chart between market cap and country weighting is that those countries with higher market caps have stock markets that have previously outperformed those of the other countries. The most dramatic example of that is Japan, for instance. It outperformed the US market for 4 straight decades from 1950-1990, and went from just a few percent of world market cap to, at one point in late 1989 or 1990, around 40%, and briefly exceeded that of the US. It certainly was not a fundamental change in the Japanese stock market relative to the US market but more an example of how far valuations can get stretched.

If I was going to use global market cap to influence a particular country bias I would not use it to justify a home country bias based on a larger global market cap. I would use it to rebalance away from the countries that have increased they market cap relative to other countries, and the more dramatically they have increased the more I would rebalance away from that particular country. Otherwise you end up with the countries that have previously had the best stock returns and have the lowest forward looking returns.

Using your logic, in 1900 you could justify a larger UK and German equity bias, in the 1950s and 1960s (and today) you could justify a larger US equity bias, and in the late 1980s you could have justified a larger Japan bias. In none of those instances does it appear an investor with a 20-30 year or more time horizon would have been better served overweighting those markets, and in a number of cases it really would have hurt you quite a bit. In pretty much every situation looking forward 20-30 years or more most of those markets with the largest world market cap shrunk, indicating underperformance relative to one or more other countries. If I take anything away from this chart, it would be to avoid putting all your eggs in one country's basket, especially the one who has increased their world market cap the most.
I think there may be a misunderstanding. I am not suggesting that I would ever want to overweight another country's market relative to its overall market share. I don't buy any more Apple or Alphabet stock than the market share, but neither do I underweight Apple or Alphabet just because they're currently doing quite well.

In a similar vein, had the products existed in 1900 to hold market-cap-weighted amounts of UK and Germany equity, I would have held them proportional to their market cap weight.

In contrast, I think it is reasonable to hold a modest home-country bias in stocks. Residing in the US, this means I'm OK holding, say, 60% US among my equity portfolio rather than 55% or 50% if that's the current market share of US equity. Similarly, if I lived in the UK I'd be willing to hold maybe 8-10% of my portfolio in UK equity rather than the 6% of its true market share (as of 2017). The home-country bias ignores overweighting any foreign assets just because they're increasing in market share and is modest in scope (say, the larger of 5% absolute or 10% relative overweighting).
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Re: What has been the historical market cap weight of total US stock vs world?

Post by Tyler9000 »

withrye wrote: Tue Jun 15, 2021 9:15 am Thus the question regarding the historical market cap weight of total US stock vs world. I want to know how far my 50/50 US/Int allocation would have been relative to other historical time points (the last 50-100 years would suffice).
Since 1970, the average composition of the total developed world market has been right about 50% US and 50% ex-US. It's true that the percentage shifts over time, though, so when evaluating a split of funds to approximate the total market I find it useful to look at the real-world returns. Here's how the nominal annual returns stacked up every year for a single world fund versus a 50/50 split of US and ex-US (rebalanced annually).

Image

As you can see, the results were quite close. Some years a single fund did a little better and some years a 50/50 split did a little better, but in general I'd consider the two options interchangeable. So I totally support your idea for combining two funds to reduce fees.
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Re: What has been the historical market cap weight of total US stock vs world?

Post by NiceUnparticularMan »

If I was going to offer a general hypothesis about these patterns, I would start with wars.

It seems pretty obvious that WWI and WWII ended up being pretty bad for the stock markets of some countries (particularly if you include things like the revolution in Russia as a WWI-related event), and good for the U.S. in comparison, particularly in the "rebuilding" aftermath periods.

Conversely, others have suggested before that the Vietnam War, followed by the U.S. increasing its military expenditures as a "Cold War" strategy, were not so good for the U.S. in relative terms.

Indeed, those of us old enough can recall talk of a "peace dividend" after the dissolution of the Warsaw Pact and Soviet Union, and it certainly seems like prima facie that might well have shown up in the right period.

But then we fought the Iraq War, and there is another down period which at least prima facie seems coincident with increased military spending (and particularly increased war spending, which is arguably particularly unproductive). And then maybe another peace dividend period, and here we are.

Of course it would take a lot more work to actually prove all this. But I think it is a plausible hypothesis, at least.

And I think it suggests one sort of scenario in which the U.S. could decline a lot again in relative share. Obviously getting embroiled directly in another actual war, ala Vietnam or Iraq. But also possibly even another "cold war" of some sort that diverts a meaningful percentage of GDP to arguably less productive ends.
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Re: What has been the historical market cap weight of total US stock vs world?

Post by asif408 »

withrye wrote: Wed Jun 16, 2021 11:45 am In contrast, I think it is reasonable to hold a modest home-country bias in stocks. Residing in the US, this means I'm OK holding, say, 60% US among my equity portfolio rather than 55% or 50% if that's the current market share of US equity. Similarly, if I lived in the UK I'd be willing to hold maybe 8-10% of my portfolio in UK equity rather than the 6% of its true market share (as of 2017). The home-country bias ignores overweighting any foreign assets just because they're increasing in market share and is modest in scope (say, the larger of 5% absolute or 10% relative overweighting).
Fair enough. I'm not comfortable with doing that as a US investor, but obviously your view is much more common, even among investors in countries that are a low proportion of world market cap.

I would be less hesitant to overweight a country that is a smaller proportion of world market cap than the US simply because no other countries individually make up more than 10% of world market cap. And I would be more hesitant to overweight the US simply on how large a percentage it is currently of world market cap (57%).

Going back to your original question, though, it's hard to say whether the tax savings you get by making the changes will make up for any performance differences between the US and Int'l. I think it comes down to flexibility. In a taxable account, I'd probably start there and hold the most tax efficient portfolio possible, then adjust your allocation in tax inefficient counts from there until you reach your desired asset allocation. That way you maximize your after tax return but maintain your desired allocation, and adjust as much as possible in tax inefficient accounts going forward.
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Re: What has been the historical market cap weight of total US stock vs world?

Post by Nathan Drake »

nisiprius wrote: Wed Jun 16, 2021 11:22 am
NiceUnparticularMan wrote: Tue Jun 15, 2021 9:30 am Same chart through end of 2017:

Image
The thing I take from this--yeah, confirmation bias--is that pattern of US share from, say, 1930 to the present is best described simply as "fluctuation."

And that we should not put much trust in vague throwaway statements like "the US share of the global stock market is decreasing."

Admittedly I haven't been hearing that so much lately! I think it was circa 2010 that someone in the forum seriously disputed a throwaway comment of mine. I had said that the change in Burton Malkiel's recommendations from 1990 over that time frame (within stocks, he had started by recommending ⅙ international, and gradually raised it to ½ international) couldn't be justified simply as a response to declining US market share, because the US share in 1990 was lower than in 2010. They didn't believe it at first; hopefully they did after I produced a similar chart from Vanguard.

That recommendation could be justified as a response to increasingly large US market cap relative to the rest of the world (I.e., overvalued relative to a thesis that it should be lower)
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skepmod
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Re: What has been the historical market cap weight of total US stock vs world?

Post by skepmod »

I am an independent advisor and I boglehead my way through all my client portfolios.
This chart is so very useful. Thanks to those who posted it.
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Re: What has been the historical market cap weight of total US stock vs world?

Post by Atlantic_ave »

This chart has been updated last week by the scholars, here's the latest one (up to q1 2024):
Image
More info and chart here:
https://www.ubs.com/global/en/investmen ... rbook.html
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