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 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 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 most of the composition of the U.S. economy. As a result, the value of the S&P and various stocks within the index is closely watched by market participants since their performance represents a gauge of 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.
- From 1969 to 1981, the index gradually declined 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 46.13% from October 2007 to March 2009 but recovered all of its losses by March 2013.
- In 2020, the coronavirus pandemic sent the world into a recession and equity markets reeling as the S&P 500 plummeted nearly 20%.
- The S&P bounced back in the second half of 2020 and reached several all-time highs in 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. To be added to the S&P, a company must meet certain liquidity-based size requirements—including a market capitalization of $14.6 billion or greater.
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 an index 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 nine 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 a key vehicle for investors who want exposure to the broad U.S. market index funds. The price appreciation of the S&P 500 tends to track the growth of the U.S. economy. Price swings in the S&P 500 also tend to accurately reflect 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 started trading in 1957. During its first decade, the value of the index rose to slightly over 100, reflecting the economic boom that followed World War II. From 1969 to early 1981, the index gradually declined. During this period, the U.S. economy grappled with stagnant growth and high inflation.
On Dec. 27, 2021, the S&P 500 closed at a record high of 4,766.18 points.
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 soared. 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 period was marked by overvaluations, excess public enthusiasm for stocks, and speculation in the technology sector. When the bubble burst between 2000 and 2002, the technology-centric NASDAQ took a major hit, while the S&P 500 also took a lesser hit. The S&P recovered, eventually reaching new highs in 2007. This period was fueled by growth in housing, the financial sector stocks, and 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 the previous decade's 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 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.
The index went on a nearly 10-year bull market. A bull market is a rising stock market that doesn't experience a price correction of 20% or more. 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 were 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 3,386.15, which was an all-time high at that time. However, by March 23, 2020, the index had plummeted to 2,237.40—falling 34% 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 August 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 3,756.07 on Dec. 31, 2020. The S&P continued its positive trend into 2021. On Dec. 27, 2021, the index closed at yet another all-time high of 4,766.18 points. As of April 20, 2022, the index was trading at 4,462.21.