The S&P 500, also referred to simply as the S&P, was introduced by Standard & Poor's in 1957 as a stock market index to track the value of 500 large corporations listed on the New York Stock Exchange (NYSE) and the NASDAQ Composite. The collection of stocks that make up the S&P is intended to represent the overall composition of the U.S. economy. Its exact combination and the weightings of various constituencies are adjusted as the economy changes, and certain stocks have been added and dropped over time.
- The S&P 500 was introduced by Standard & Poor's in 1957 as a stock market index to track the value of 500 large corporations listed on the New York Stock Exchange (NYSE) and the NASDAQ Composite.
- 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–while the U.S. economy grappled with stagnant growth and high inflation.
- During the financial crisis that has come to be known as the Great Recession, the S&P 500 fell 57.7% beginning in October 2007 and bottoming out in March 2009.
- By March 2013, the S&P had recovered all its losses from the financial crisis, and over the last decade, the S&P has climbed more than 400% to reach all-time record highs.
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 1.0m; minimum monthly trading volume of 250,000 shares in each of the six months leading up to the evaluation date.
S&P Is a Bellwether of the U.S. Economy
The S&P is widely thought of as the best representation of the U.S. stock market. 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.
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 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.
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.
The S&P 500 is a capitalization-weighted index, so its components are weighted according to the total market value of their outstanding shares.
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.
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.
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. This was the largest drop in the index since World War II.
By March 2013, the S&P had recovered all its losses from the financial crisis. Over the last decade, the S&P has climbed more than 400% to record highs.