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History Of S&P 500 Index

History of S&P 500 Index

History Of S&P 500 Index, How It Changed In The Last 50 Years.

Change is a constant feature in the world of business, and companies that fail to recognize it and adapt accordingly are headed for failure. Business change is better tracked through changes in S&P 500 Index. The article gives you a brief history of S&P 500 Index, S&P 500 which means standard & Poor’s 500, was formulated in 1957 as a stock market indicator to help track the net worth of 500 companies listed on the NASDAQ Composite and the New York Exchange (NYSE) at the time. 

S&P’s is a company providing credit ratings, financial data, and several equity indexes. Understanding S&P 500 requires that you know the market index. A market index refers to investment collection like stocks grouped together to help an investor track how a particular financial market segment is performing. 

The S&P 500 is the snapshot that helps analysts know which industries and companies have the largest stock at a certain point in time. The stocks components of the S&P 500 are a representation of the overall U.S economic composition. This means that various players in the stock markets closely monitor various stocks forming the index through market participants because the performance of S&P indexes is the gauge of the U.S economy. We look at five decades of changes in the S&P 500 components, helping us determine the shift and trends in the economy. 

How are companies selected for S&P 500

A committee determines companies included in the S&P 500 as representatives of various industries making up the U.S. economy. The committee is guided by some set standards that a company under consideration must meet. The main one is the liquidity and size of the corporation.

The company must have a market capitalization equal to or greater than $8.2 billion, have a minimum trading volume of 250,000 shares every month for six consecutive months before the evaluation date, and have an annual dollar value above $1.0 million. 

The  S&P 500 Index value is calculated by adding the adjusted market capitalization of all the listed 500 company stocks and then dividing it by a certain factor called the Divisor. For instance, let us assume that the total adjusted market capitalization of all the 500-company stock is $14 trillion and the Divisor is 9.0212 billion, the S&P 500 Index would be 1,551.90. You can access information about adjusted market cap from S&P’s website. 

S&P 500 Quick Facts

Quick FactsData Credit SPGlobal.com
Weighting MethodFloat-adjusted market cap weighted
Rebalancing FrequencyQuarterly in March, June, September & December
Calculation FrequencyReal-Time
Calculation CurrenciesUSD, AUD, BRL, CAD, CHF, EUR, GBP, HKD, JPY, MXN, SGD
First Value DateJan 03, 1928
Launch DateMarch 04, 1957

Current Top-10 Companies in S&P 500

ConstituentSymbolSector
Apple Inc.AAPLInformation Technology
Microsoft CorpMSFTInformation Technology
Amazon.con Inc.AMZNConsumer Discretionary
Facebook Inc. AFBCommunication Services
Alphabet Inc. AGOOGLCommunication Services
Alphabet Inc. CGOOGCommunication Services
Tesla, Inc.TSLAConsumer Discretionary
Nvidia Corp.NVDAInformation Technology
Berkshire Hathaway BBRK.BFinancials
JP Morgan Chase & Co. JPMFinancials

How the S&P Changed Over the Last 50 Years

When one glances at historical data showing industry representation of yearly change in S&P, one will notice several shifts. You will notice a drastic industrial change in the number of companies included in the S&P Index. For example, by 1969, there were 166 out of 500 (33%) of companies were industrials; however, now only 70 industrial companies have representation in the S&P Index.

Though this was a huge drop, the industrials industry was still the leading company representation during the 50 years under consideration except for 17 years. Recent statistics even suggest that the industrial industry is experiencing growth as companies adapt to the prevailing conditions. 

S&P Sector Breakdown 2021

S&P Sector Breakdown chart
DataSource Credit: spglobal.com

Another change that we will discuss is the technological impact on the S&P 500 Index and the U.S economy. In 1969 only 16 IT companies were included in the S&P index, occupying position second last as an industry in the economy. However, by the 1890s, the IT industry started to rise and exploded in the 2000s, enabling it to claim its place among the S&P Index component. The industry has seen tremendous growth as a representation of the economy, as we will see. 

S&P The Bellwether for the U.S. Economy

The S&P Index is called the bellwether stock because it is the gauge for determining the economy’s direction. By looking at the index, one would know the U.S stock market is performing, thus how the economy is fairing. Therefore, passive investors often rely on S&P as a default vehicle, giving them the U.S economy exposure for a better investment decision.

Since it was started in 1957, the S&P has had a tremendous influence and remarkable performance, outshining major asset classes in the economy, including commodities and bonds. 

The S&P 500 has successfully tracked the economic growth in the United States in character and size, as shown in its price appreciation. Even the turbulence in the U.S economy during hard times, such recession has been indicated by the S&P 500 price swings. This shows that the index reading perfectly represents the U.S economy, a healthy factor for investment decisions.

Price Swings in the S&P 500

The S&P 500 started to function in 1957, at an index value of 386.36. This value rose to 700 in the first 10 years of operation, signifying the economic boom after World War II. From 1969 to the beginning of 1981, the S&P Index declined to below 300 as the U.S. economy struggled with high inflation and stagnant growth.

1980-82 Recession and the Oil Crisis

The government successfully alleviated inflationary pressure through various Federal Reserve interventions and raising interest rates. These measures led to the bull market, lasting from 1982 to 2000, leading to a rise in the stock market as indicated in the rise in S&P 500 by 1,350%.

Tech Bubble – 2000’s

In the 2000s, there was a technology bubble in the stock market. This bubble was caused by several factors, such as increased public interest in stocks, overvaluations, and increased speculation in the tech industry. However, when the bubble burst, the S&P 500 Index fell by 40%, with a tech-centric component of S&P, NASDAQ falling by approximately 90%.

The S&P would then recover from the fall, reaching higher levels in 2007 as the housing and real estate industry grew. This rise in S&P 500 could also be explained by growth in commodity and financial sector stocks. 

The GFC – 2008 Financial Crisis

The gains from the technological bubble were reversed when housing prices fell. Too many debt defaulters caused market panic, distrust, and fear of whether stocks were a reliable investment option. The S&P 500 index plummeted from its new heights in 2007 to 57.7%.

The fall was worsened by the Great Recession’s financial crisis that pushed the S&P 500 index to its all-time low in March 2009.  A similar huge drop was only seen during World War II. 

A Decade of Bull Market

The S&P index recovered by March 2013, recouping the losses incurred in the Great Recession to soar past its 2007 value, reaching its all-time high. This height was higher than what was experienced during the tech bubble in the 2000s 12 years ago. The S&P sustained this rise in value for another 7 years, the longest run on the constant run. 

On March 6th, 2007, the financial crisis was at its peak, and the S&P traded on its low with a value of 666.80. However, from that day on, the S&P 500 went on a 10-year bull market. The bull market is experienced when the stock market continues to rise without a 20% price correction.

The S&P bull market did not respond to any pullbacks along the way until February 2nd, 2020 when it peaked and closed at 3,386.20 – a 400% return for the entire period.  

The S&P bull market was sustained by low-interest rates and stable economic growth, keeping the stock prices on a constant rise for 10 years. Many investors who used to invest in bonds for stable income generation due to steady interest rates turned to stock.

The extended period of low interest rates, similar to the period after the Great Recession, made investing in stocks lucrative. Many investors poured money into stocks hoping to cash on dividends. This interest in the stock has led to the rise in S&P Index during the 10-year run.

Coronavirus Pandemic – Covid 19

The emergence of the Covid-19 pandemic in early 2020 led to several countries taking preventive measures, including quarantines. Businesses shut their doors & people were commanded to stay at home. This closure of businesses has severely impacted many economies, with the S&P 500 index spiraling into a tailspin.

By March 23rd, 2020, the index recorded a more than 51% decline, reaching the lows of 2,237.40 in one month. This fall showed the severity of the U.S. economy, experiencing a 32.9% decline in GDP in the second quarter than the previous year. With the rolling out of vaccines, hope in the stock market pushed the S&P 500 index past the previous highs from February.

Some of the factors facilitating this optimism in the stock markets included loan programs for businesses hard-hit by the pandemic, trillions of dollars from the government as a fiscal stimulus, and Federal monetary policy that lowered interest rates. 

Quarter 3 of 2020 registered a positive impact on the economy as the U.S. GDP grew by 33.4% above 2019. However, by Q4 20202, the economy showed reduced growth, with the U.S. GDP growing by 4.3% than the same duration in 2019.

The U.S economy witnessed tremendous improvement from the time Covid-19 hit in March with an S&P 500 Index of 2,237.40 to a new peak of 3,756.10 at the close of the year 2020, signifying a 68% improvement. The S&P maintained a good run in the earlier part of 2021, reaching its all-time peak on April 1st, 2021, with a value of 4,019.87. 

What makes Stock market rise?

  • Low-interest rates.
  • Rising middle class.
  • Stable political environment.
  • Technological innovations.
  • Increased globalization causing strong economic growth.
  • Dropping commodity prices. 

Conclusion

The S&P 500 Index has proven to be an accurate indication of the U.S. economy’s performance, rising when the economy is doing well and plummeting during the financial crisis. Investors can benefit from monitoring S&P values in making a wise investment decision. The industry and companies contribution to the index also shows which industries are experiencing growth and why thus useful for investment purposes. 

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