Old Economy vs. New Economy Stocks: An Overview
Old economy is used to describe the economic era of the early parts of the twentieth century when industrial innovation was expanding in the U.S. and around the world. Comparatively, the new economy refers to the high-growth innovation of the twenty-first century which has been substantially focused around the use and development of the internet, internet technology, and technology in the cloud.
- Old economy stocks were central to the success of the Industrial Revolution in the early twentieth century and have matured through many market cycles to become mature businesses focused on high-scale production.
- New economy stocks are part of the technology revolution taking shape in the twenty-first century as growth is centered around internet technology services.
- Old economy and new economy stocks have very different attributes that usually attract investors for different reasons.
What Are Old Economy Stocks?
The Industrial Revolution was a time of innovation for the development and manufacturing efficiency of products. As such, old economy stocks were the market’s top leaders, growing throughout the years to build out the foundations of the industrial and manufactured goods sectors. Within these sectors, investors will now find large, mature, well-established businesses with consistent growth and relatively steady fundamental characteristics.
Some of the most notable old economy stocks include names like Ford (F), Caterpillar (CAT), 3M (MMM) and Procter & Gamble (PG). These old economy companies' business activities dominated the economic landscape before the dotcom era of the late 1990s ushered in an entire industry of new, high-growth companies. Old economy stocks have sustained business activities through many market cycles. While they continue to innovate within their market segments, overall they participate in traditional business activities with relatively minimal investment or involvement in leading new era technologies.
Many investors equate old economy stocks with the term blue chip. Old economy stocks are also typically classified in the value category which is known for relatively low volatility, stable earnings, consistent returns, dividends for income, and steady streams of cash flow.
What Are New Economy Stocks?
In contrast, so-called new economy stocks are the companies leading a revolutionary transition to the internet and activities in the cloud. The market has dubbed Facebook, Apple, Amazon, Netflix, and Google as five of the top new economy companies to watch under the acronym FAANG but there are also many more. Branching out from basic internet search, investors will find a plethora of internet-based technology offshoots that are also driving new economy growth in the twenty-first century, like companies in the areas of internet of things, social media, cryptocurrency, cloud storage, e-commerce, streaming, sharing, big data, fintech, and artificial intelligence.
New economy stocks are in the business of providing innovation for the easy and fast exchange of services. In comparison to old economy stocks, they can have much lower costs of sales and much less need for the physical assets required to manufacture, store, and sell physical goods.
The new economy era reportedly began in the 1990s, fueling the dotcom bubble and dotcom burst as investors saw the vast potential and economic shift. In the twenty-first century, these companies have proved to achieve much of the success initially envisioned, continuing to take huge strides with relatively high financial risks to achieve new groundbreaking services centered around the capabilities of the internet and internet technologies. As such, new economy stocks tend to fall in the growth category. They have huge growth potential, treading into new waters and uncovering new opportunities that can possibly revolutionize the way individuals and businesses interact.
As service-oriented, growth companies, the fundamentals of these businesses are drastically different when compared to old economy stocks. New economy stocks typically need to take on high levels of debt, may have a low return on equity, and often report high price to earnings levels as investors believe in long-term speculation. New economy stocks are generally not known for paying out dividends and will typically have relatively lower levels of cash flow since cash is often used for reinvestment.
Investing: Old vs. New
It can be important for an investor to distinguish between old economy and new economy stocks since the two have very different attributes, risk profiles, and return potentials. In general, when making portfolio decisions, old economy and new economy stocks will usually filter into either the value or growth category. For investors looking to broadly diversify their portfolio, a mix of old and new economy stocks can be rewarding. However, depending on risk tolerance and liquidity needs, some investors may choose to overweight towards one or the other.
Old economy value stocks can be a relatively low-risk stock investment that attracts a variety of investors. These value stocks have realistic fundamentals, reasonable price to earnings levels, and low volatility. Many old economy value stocks also pay regular dividends which appeals to income investors and also increases their total return. As such, many investors look to old economy stocks for their stability, steady growth, and dividend income.
Buying new economy stocks in the twenty-first century comes with more risk but could pay off for investors with long time horizons that can wait it out until these stocks mature. The market values new economy growth stocks a little differently than the blue chips with more allowance for speculation. In general, investors are willing to pay much more per dollar of earnings for new economy growth stocks.
Most new economy growth stocks will have higher betas which show their higher risks in comparison to the market. With the higher beta, investors have the opportunity to gain more than the market on uptrends. Investors can also lose more on downtrends. New economy growth stocks may also fluctuate much more with idiosyncratic risks as well as earnings announcements since lower consistency and stability are factors. Generally, when analyzing a new economy company, a greater focus is placed on growth expectations and earnings estimates which are speculative forecasts based on opportunities that can be very important along with real results.