Table of contents:
- 1 History of the S&P 500
- 1.1 Computer enables calculation
- 1.2 Representative companies
- 1.3 S&P 500 Rulebook
- 1.4 Different versions of the S&P500
- 1.5 Performance Milestones of the S&P 500
- 1.6 100 points record in the S&P 500
- 1.7 New record in the bull market
- 1.8 Largest swings of the index
- 1.9 S&P 500 as benchmark
- 1.10 Sectors included in the index
- 1.11 Conclusion on the S&P 500 Index
The history of the S&P 500 dates back to 1957, but its predecessor index, the Composite Index, was published by S&P 30 years earlier. Standard and Poors’ history even goes back to 1860. This fact is reason enough for Trading-Treff to take a closer look at this share index.
History of the S&P 500
As early as 1923, the company Standard and Poors combined the performance of some shares in an index. The Composite Index, which was designed at that time, was broadened in 1926 to include the shares of 90 companies, 50 of which were from the industrial sector.
In 1957, the index was ready to go. On 27 February, the Standard 500 Index was presented to a group of 35 journalists at the Lawyers Club New York. This was done by Lew Schellenbach, the then PR head of Standard & Poors, also known as the father of the S&P 500 Index. He introduced the Index to the journalists present between the main course and the final coffee and discussed the advantages of the new Index.
Computer enables calculation
The application of new calculation methods and the use of state-of-the-art computer technology made this type of index possible. It was the Boston-based company Melpar Inc. that provided the new technology that enabled S&P to perform the index calculation much more accurately and efficiently.
The new technology was groundbreaking, because for the first time an index could be calculated and published on an hourly basis. Its breadth was also impressive compared to the indices that had existed up to that point. Right from the start, the index was designed as an index weighted on the basis of market capitalization. It takes into account price movements as well as the outstanding shares of a company.
This form of weighting was designed by Lew Schellenbach and his colleague George Olsen to filter out the unimportant or insignificant shares listed on the New York Stock Exchange. In addition to market capitalization, there are other points that must be met for a company to be included in the index.
Initially, the two 500 companies identified what they felt best represented the American economy. Of the selected companies, 425 were from the industrial sector, 25 railroad companies (transportation) and 50 from the service sector. The index components they included represented 90% of the total US market capitalization at that time.
In anticipation of their clients’ needs for historical data, Olsen calculated the value of the index and its sub-indices back to the year 1928 using daily values. This 80-page document, which also explained the methodology of the historical calculation, was offered to securities analysts, members of the American Stock Exchange and other interested parties after its completion.
S&P commented on the new S&P 500 Index with the following words:
- “Before too long we hope to perfect a whole new series of companion indexes, which will
- provide our subscribers with standard composite balance sheet data for each of the 91 industrial
- groups. These will provide the analytical profession with a whole new set of tools that should put
- the art of security analysis years ahead. In other words, we have just begun to tap the electronic
- age at Standard & Poor’s.”
You see it was not only a revolution in index development, but also a huge simplification of technical analysis.
S&P 500 Rulebook
Due to its age, the S&P 500 Index is not comparable with the modern indices of the STOXX family. Although it has a set of rules, the final decision on inclusion in the index is made by a committee.
It is therefore not only based on a set of rules, but the decision on inclusion has a subjective component. This is something that is also practised in the Dow Jones Index, but which is criticised by critics, as the adjustment of an index is not 100% transparent. However, modern indices, such as those of Russel and STOXX, are only based on a strict set of rules and are therefore 100% transparent and more comprehensible.
As mentioned above, the S&P 500 is an index weighted on the basis of market capitalization. In addition to market capitalization, the following points are also important that must be met for a share to be included in the index.
- Liquidity in share trading
- Registered office of the company
- free float
- Sector classification (Global Industry Classification Standard)
- Financial sustainability of the company
- the length of time since the company has been listed on the stock exchange
- must be listed on the NASDAQ or NYSE
At present, for example, a company must have a market capitalization in excess of 1.6 billion US dollars in order to be included in the index. The minimum limit for liquidity is currently 250000 traded shares per month.
Different versions of the S&P500
Unlike the DAX Performance Index, the S&P 500 is a price index. This means that the dividends paid out are not included in the calculation of the index. But there are other versions of the S&P 500.
In 1987, for example, the S&P 500 Total Return Index was introduced. This index includes the dividends paid to investors, making it a performance index.
In addition, there is also the S&P 500 Net Total Return Index, which takes withholding tax of 30% into account.
Performance Milestones of the S&P 500
There have of course been ups and downs in the history of the S&P 500. Since its inception in 1957, the index has generated sufficient positive and negative emotions among investors and traders. However, in the long term, the positive experiences of investors outweigh the negative, as the index has posted an average annual return of over 8% since its inception.
Historically, this is an enormous increase in return if you look at the previous centuries. In the period between 1801 and 1900 the index did not even achieve an average annual return of 1%. If we now look at the period 1901 to 2000, there is already a significant deviation. In this period the average annual return is more than 5%. It must be taken into account that the calculated performance of the S&P 500 in the first 50 years of the 20th century was only 2% per year.
Only in the second half of the 20th century did a significant Trend acceleration. However, this was also accompanied by recurring crises and crashes. The stagnation of the 1970s will be well remembered by the older students, but also the memorable year 1987, when a phenomenal crash occurred.
100 points record in the S&P 500
In June 1968, the S&P 500 reached the 100-point mark for the first time ever. But this level could not be maintained and by the beginning of the 1970s the index had lost about 30% of its value. This was also the start of the big sideways phase that had dominated the entire 1970s. In percentage terms, this decade was a very volatile one in which the index remained in a range.
The liberation came at the beginning of the 1980s, but it was not until the end of 1985 that the S&P 500 had doubled to 200 points. By 1987, the index had reached a value of over 330 points, but the Black Friday crash on 19 October followed. As a result of the crash, the index lost more than 35% of its value, but less than two years later the old high was reached again.
New record in the bull market
A strong bull market prevailed since the 87 low and the S&P 500 rose to 1552 points by 2000. In 1987, the low was 216 points, an impressive performance which is shown below. Within 13 years the value of the index increased sevenfold.
A development that is due to the rapid technological progress of the time.
But then the lamentation came back and the markets went into a bear market. Only 13 years and a global financial crisis later, the S&P 500 was able to leave the range it had then drawn and open a new bull market.
This bull market now lasts for 5 years, during which the index has so far gained more than 80%.
Largest swings of the index
Over the course of time, the index, although its components, as well as the derivatives (futures) derived from it, are extremely liquid, has repeatedly experienced enormous daily fluctuations.
The five largest daily gains of the S&P 500 Index in percent
The five largest daily losses of the S&P 500 Index in percent:
What is noticeable in the percentage changes is that the strongest movements occurred mostly before 1990. Four of the five strongest gain days of the S&P 500 Index are before 1990, and it is even clearer in the case of losses, since all five of them occurred before 1990.
The top five years of the S&P 500 Index in percent:
The five worst years of the S&P 500 Index in percent:
As with changes on a single day, most results are before 1990, with 1995 standing out with a performance of 34.11% for the best years and 2008 for the worst years.
During the global financial crisis, the index fell by -38.49% within one year. Apart from that, the remaining data is again well before 1990, and most of it even before 1970.
The volatility decreased over the years, a fact that is probably due to the above-mentioned acceleration of the trend since the 1970s.
S&P 500 as benchmark
Another point that led to a decrease in volatility is likely to be the increased liquidity and volume traded. This development affects not only the components of the index, but also the futures and options. This is why the S&P 500 has long been suitable as a benchmark in the world of asset management.
In addition, over time, index funds emerged, which are the predecessors of today’s exchange traded funds. Even then, the mutual funds designed in this way attracted enormous amounts of capital, as they were relatively inexpensive compared to the competition.
Today, more than 7.5 trillion US dollars are tied to the S&P 500 Index, as it serves as a benchmark for the stock markets for many asset managers. Of the 7.5 trillion, around USD 2 trillion are in turn invested in index replicating funds (ETF’s).
Currently, the major American stock index represents approximately 80% of the US market capitalization.
Sectors included in the index
The index currently contains companies from 11 sectors. The allocation is based on the Global Industry Classification Standard (GICS). It is important to pay attention to adjustments of the GICS regulations. Although it is quite insignificant for the S&P 500 itself, such a change can be serious for the Sub Indices. The same applies to companies whose shares no longer qualify for the index and are consequently removed from it.
The current weighting is as follows:
The relatively high weighting of the information technology sector is due to companies such as Amazon, Google and Apple. These companies have performed particularly well in recent years, which has increased the weighting of the sector.
Conclusion on the S&P 500 Index
The time-honored index, despite its flawed set of rules, is still the benchmark for measuring the performance of the US stock market. Thanks to its broad positioning and regular alignment, the index will continue to play an important role in the financial world in the future. The high liquidity is also very suitable for traders.
The S&P 500 Index is simply the heavyweight among all indices worldwide and its dominance and the sheer amount of capital tied to the index will ensure that it will continue to accompany the investors and traders community for a long time to come.
Read my other articles about stocks trading:
- Cannabis Stocks
- ETF – Invest Simply And Cheaply In Shares: With Index Funds
- ETF Account
- Gaming Stocks
- Is it risky to trade short on stocks?
- Learn to Trade Stocks: 10-Minute Crash Course
- Markets.com demo account
- Penny Stocks – Investing Like The Wolf Of Wallstreet?
- S&P 500 – Facts, Figures, And History
- Selling stocks – How to quickly sell stocks
- Shares For Beginners – Tips & Information For Successful Stock Trading!
- Space Stocks
- Stock Broker
- Stock index – Definition and Examples
- Stock Portfolio
- Stock Signals
- Stock Terms
- Stock Trading Accounts – Comparison of Portfolios & Brokers
- Stock Trading Demo Account | Free of Charge
- Stock Trading Strategy
- Stock Trading Volatility
- Stocks Fundamental Analysis – Discover Top Stocks Without Being An Expert
- Time Component of Short Long Positions in Stocks
- What are Stock CFDs | Explanation & Tutorial
- What is Growth Investing?
- What is Stock picking? – Trading Strategy Tutorial
- What Is The All Weather Portfolio?
- What is the Buy and Hold Strategy in Stocks Trading?
- What is the Dividend Strategy in Stocks Trading?
- What is the Dogs of Dow Strategy in Stocks Trading?
- What is Value Investing?
- What moves the stock prices