The S&P 500, which is short for Standard & Poor's 500, was introduced in 1957 as a stock market index to track the value of 500 corporations that have their stocks listed on the New York Stock Exchange (NYSE) and the NASDAQ Composite. Standard & Poor's is a company that provides financial data, credit ratings for investments, and various equity indexes. A market index is a collection of investments, such as stocks, that are grouped together to track the performance of a particular segment of the financial market.
The collection of stocks that make up the S&P 500 is designed to represent the overall composition of the U.S. economy. As a result, the value of the S&P and various stocks within the index are closely watched by market participants since their performance represents a gauge as to the health of the U.S. economy.
The exact combination and weightings of the various constituencies within the S&P 500 are adjusted as the economy changes, and some stocks have been added and removed from the index over the years.
- The S&P 500 was introduced in 1957 as a stock market index to track the value of 500 large corporations listed on the New York Stock Exchange.
- During its first decade, the value of the index rose to nearly 700, reflecting the economic boom that followed World War II.
- From 1969 to early 1981, the index gradually declined–falling below 300—while the U.S. economy endured stagnant growth and high inflation.
- During the 2008 financial crisis and the Great Recession, the S&P 500 fell 57.7% from October 2007 to March 2009.
- By March 2013, the S&P had recovered all of its losses from the financial crisis and continued on its 10-year bull run climbing more than 400%.
- In 2020, the coronavirus pandemic sent the world into a recession and equity markets reeling as the S&P 500 plummeted 51%.
- The S&P bounced back in the second half of 2020 on vaccine hopes pushing the index to a new all-time high of 4,019.87 by April 01, 2021.
Requirements for Inclusion in the S&P 500
The components of the S&P 500 are selected by a committee and are determined to be representative of the industries that make up the U.S. economy. In order to be added to the S&P, a company must meet certain liquidity-based size requirements: market capitalization must be greater than or equal to $8.2 billion; annual dollar value traded to float-adjusted market capitalization is greater than 1.0 million; a minimum monthly trading volume of 250,000 shares in each of the six months leading up to the evaluation date.
To calculate the value of the S&P 500 Index, the sum of the adjusted market capitalization of all 500 stocks is divided by a factor, usually referred to as the Divisor. For example, if the total adjusted market cap of the 500 component stocks is $13 trillion and the Divisor is set at 8.933 billion, then the S&P 500 Index value would be 1,455.28. The adjusted market capitalization of the entire index can be accessed from the Standard & Poor's website. The exact number of the Divisor is considered to be proprietary to the firm, although its value is approximately 8.9 billion.
S&P as a Bellwether for the U.S. Economy
The S&P is widely thought of as a bellwether representation of the U.S. stock market. The term bellwether stock refers to a stock that's considered a leading indicator of the direction of the economy.
The S&P is also the default vehicle for passive investors who want exposure to the U.S. economy through index funds. Since 1957, the S&P has performed remarkably well, outpacing other major asset classes, such as bonds and commodities.
The price appreciation of the S&P 500 has accurately tracked the growth of the U.S. economy in terms of size and character. Price swings in the S&P 500 have also accurately reflected the turbulent periods in the U.S. economy. As a result, the long-term chart of the S&P 500's price history doubles as a reading of investor sentiment about the U.S. economy.
Price Movements in the S&P
The S&P 500 opened on January 1, 1957, at 386.36. During its first decade, the value of the index rose to nearly 700, reflecting the economic boom that followed World War II. From 1969 to early 1981, the index gradually declined, eventually falling to under 300. During this period, the U.S. economy grappled with stagnant growth and high inflation.
On April 01, 2021, the S&P 500 hit a record high of 4,019.87.
The Oil Crisis and 1980-82 Recession
Through the Federal Reserve's raising of interest rates and intervention, inflationary pressures were successfully eased. This contributed to the bull market from 1982 to 2000, when stock market prices rose and the S&P 500 climbed 1,350%. Other factors that contributed to the rise in stock prices were interest rates trending lower, strong global economic growth as a result of increasing levels of globalization, a rise in the middle class, technological innovations, a stable political climate, and falling commodity prices.
The Tech Bubble
In 2000, the stock market experienced a bubble. This time period was marked by overvaluations, excess public enthusiasm for stocks, and speculation in the technology sector. When the bubble burst, the technology-centric NASDAQ fell nearly 90%, while the S&P 500 fell 40%. The S&P recovered, eventually reaching new highs in 2007. This period was fueled by growth in housing, in the financial sector stocks, and in commodity stocks.
The S&P 500 is a capitalization-weighted index, so its components are weighted according to the total market value of their outstanding shares.
The 2008-09 Financial Crisis and Great Recession
However, many of these gains were reversed after a decline in housing prices. Widespread debt defaults created an environment of intense fear, and distrust of stocks as a trustworthy investment. The S&P 500 fell 57.7% from its new high in October 2007 before bottoming out in March 2009 during the financial crisis that has come to be known as the Great Recession. The decline was the largest drop in the S&P index since World War II.
The 10-Year Bull Market
By March 2013, the S&P had recovered all of its losses from the financial crisis soaring past the highs from 2007 and the prior highs from the tech bubble of 2000. To put the move in perspective, it took the S&P 500 nearly 12 years to break the tech bubble highs of 2000 and hold onto those gains. However, the rally didn't end in March 2013 and the S&P continued higher for nearly another seven years.
From March 06, 2009, when the S&P traded as low as 666.80 following the financial crisis, the index went on a nearly 10-year bull run. A bull market is a rising stock market that doesn't experience a price correction of 20% or more. Although there were some pullbacks along the way, the S&P bull market didn't peak until the index closed at 3,386.20 on Feb 02, 2020—more than a 400% return over the period.
Stable economic growth and low-interest rates helped to keep equity prices on the rise during the 10-year run. Some investors typically opt for more stable, income-producing investments, such as bonds that pay a steady interest rate. However, during extended periods of low-interest rates, as was the case following the Great Recession, bond yields become less attractive since yields tend to move in tandem with market interest rates. As a result, many investors poured their money into the stock market including buying up dividend-paying stocks. Dividends are cash payments made to shareholders by companies as a reward for owning the stock.
During periods of low rates and steady economic growth, equity markets sometimes become the only game in town where investors can earn a steady yield—which can lead to a prolonged bull market.
The Coronavirus Pandemic of 2020 and 2021
The global spread of Covid-19 in early 2020 led to many countries issuing quarantines in which individuals were ordered to stay home and businesses ordered to shut down. The expected negative impact on economic growth sent equity markets, such as the S&P 500, into a tailspin.
On Feb. 19, 2020, the S&P 500 had closed at 3,386.20, which was an all-time high at that time. However, by March 23, 2020, the index had plummeted to 2,237.40—recording more than a 51% decline in just over a month. The impact on the U.S. economy was also severe. In the second quarter (Q2) of 2020, economic growth in the U.S. as measured by Gross Domestic Product (GDP), declined by 32.9% from one year earlier.
By Aug. 2020, hope had sprung anew pushing the S&P past the prior all-time highs from February. Many factors led to the euphoric optimism throughout the equity markets, including trillions of dollars in fiscal stimulus by the U.S. government, loan programs for struggling businesses, the Fed's monetary policy of low-interest rates, and vaccine production.
The positive impact on the economy was again recorded in the U.S. GDP figures for Q3 2020 when GDP grew by 33.4% from a year earlier. In Q4 2020, GDP grew by 4.3% from the same period the year prior.
The S&P 500 surged from the March pandemic low of 2,237.40 to close out 2020 at 3,756.10 on Dec. 31, 2020—a nearly 68% gain. The S&P continued its march higher in the early part of 2021 closing at a new all-time high of 4,019.87 on April 01, 2021.