The S&P 500 was introduced by Standard & Poor's in 1957 as a market index to track the value of 500 large corporations listed on the New York Stock Exchange and the NASDAQ Composite. This collection of stocks is intended to represent the overall composition of the economy. Its exact combination and weightings of various constituencies is adjusted as the economy changes. Stocks are added and dropped over time as well.
The S&P 500
The S&P 500 is considered to be a bellwether and leading indicator for the economy in addition to the default vehicle for passive investors who want exposure to the U.S. economy via index funds. Since 1957, the S&P 500 has performed remarkably, outpacing other major asset classes such as bonds or commodities.
Its price appreciation has tracked the growth of the U.S. economy in terms of size and character. Its price swings have also reflected the turbulent periods in the U.S. economy. The long-term chart of the S&P 500's price history also doubles as a reading of the emotional highs and lows of investors.
The S&P 500 opened on Jan. 1, 1957, at 386.36. It rose to nearly 700 over its first decade. This was basically the end of the boom that followed the end of World War II. It took more than 20 years for those highs to be decisively broken. From 1969 to early 1981, the index gradually declined, falling under 300. This period was unpleasant for the broader economy, as it grappled with stagnant growth and high inflation while the S&P 500 declined more than 50%.
Eventually, through high interest rates, the Federal Reserve was successful in reducing inflationary pressures. This was one major contributor to the bull market from 1982-2000, when the S&P 500 climbed 1,350%. The reduction in inflation rates resulted in interest rates trending lower over this time. Some other tailwinds adding fuel to the bull market were strong global economic growth due to globalization, billions of people all over the world entering the middle class, technology, stable political climate, falling commodity prices, and improvements in health and quality of life.
2000 was a stock market bubble marked by overvaluations, excess public enthusiasm for stocks and excess speculation in the technology sector due to hype around the Internet. This bubble burst. While the technology-heavy NASDAQ cratered nearly 90%, the S&P 500 only fell 40%, bottoming in 2002. It managed to recover to new highs in 2007, fueled by strength in housing, financial stocks and commodity stocks.
However, many of these gains were quickly clawed back with a decline in housing prices, leading to debt defaults that sent shock waves through the financial system. This was a period of intense fear, with intense public loathing of stocks as an investment. The S&P 500 fell 57% from its new highs, until bottoming out in March 2009. 2009 looks to be another historic inflection point for the S&P 500, like 1982. Over the last decade, it has climbed more than 400% to new all-time highs.