What is the S&P Phenomenon
The S&P phenomenon is the tendency of stock to show a temporary price increase immediately following its addition to the S&P 500, a major US market index.
Breaking Down S&P Phenomenon
The S&P phenomenon occurs when index funds and other investment vehicles tracking the Standard & Poor’s 500 Index (S&P 500) buy stock immediately after the S&P 500 added it to its index. The surge in buying puts upward pressure on the stock’s price. The price increase is mostly temporary, settling back down after S&P-related buying has subsided.
The S&P 500 is a market value weighted index of 500 of the largest publicly traded US companies by market value, or market capitalization. It is the most popular market index for an index fund to track. The bulk of investors and analysts consider it the most accurate single indicator of the state of the large-cap US equities market. The S&P 500’s overwhelming popularity is the reason additions to the index have a large, measurable effect on prices.
The index is maintained by the S&P Index Committee, which includes Standard & Poor's economists and index analysts. This team meets regularly to monitor the index and to consider and implement changes to the index.
Criteria for Addition and Removal from the S&P 500
Every year, several US companies gain or lose a place in the S&P 500 Index. For a company to qualify for inclusion in the index, it must satisfy certain criteria. It must be a US-based company, with at least 50 percent of its stock traded on the active exchange, high liquidity, positive earnings and good credit. Of course, companies must maintain high market capitalization. As of 2018, the cut off is $6.1 billion.
Removal from the index typically results from mergers, acquisitions or changes to an indexed company that violates one or more of the eligibility criteria. Additions typically result from a need to fill a gap following a removal. For example, in June 2018, the S&P 500 removed Time Warner from the index following its acquisition by AT&T, already an S&P 500 company. To fill the gap left by Time Warner, the S&P 500 took on FleetCor Technologies.
Right on cue, the S&P phenomenon took effect. Immediately following the announcement that FleetCor would join the S&P 500, the company saw a 6.45% jump in the price of its stock. A week later, the S&P phenomenon had dissipated, and the stock’s price settled closer to, but still marginally higher than, its pre-announcement price.