Thursday, March 28, 2013 11:11 pm
The S&P 500 notches a record. How did we get here?
By MATTHEW CRAFTAP Business Writer
Three weeks after the Dow Jones industrial average blew past its all-time high, the broader Standard & Poor's 500 index joined it in the history books.
The S&P 500 gained six points on Thursday to close at 1,569.19, topping its previous peak by four points. That previous record stood since Oct. 9, 2007.
The S&P 500 may generate fewer headlines than the Dow, its older stock-index sibling, but it's the market gauge favored by professional investors. That's largely because it covers a wider swath of companies - 500 as opposed to 30.
Like the Dow, the S&P 500 has now recovered all of its losses from the Great Recession and the financial crisis that followed. Investors who held on and put their dividends back into the market have fared even better. An investment of $10,000 in the S&P 500 on Oct. 9, 2007, would be worth $11,270 today.
Anyone brave enough to put $10,000 in the S&P 500 at the market's bottom on March, 9, 2009, would have $25,200.
Q: What's driving the stock market to a new high?
A: Since the S&P 500 bottomed out in March 2009, the economy has pulled out of a recession and started growing. Companies are making record profits quarter after quarter, they're hiring in greater numbers, and the housing market is finally recovering. The economy has expanded for 14 quarters in a row.
The Fed has helped, too. By keeping interest rates near record lows, the central bank has encouraged people to move money out of savings accounts that pay next to nothing and into stocks and other investments.
Pundits often argue that the Fed's efforts have created the illusion of a strong stock market. But that argument misses the big picture, says Mark Luschini, chief investment strategist at Janney Montgomery Scott. People buy a stock to own a share of the company's profits, and those profits keep climbing. Earnings for the S&P 500 hit $103 per share last year. That's up from $84 in 2007 and $61 in 2009.
"This isn't all smoke and mirrors," Luschini says. "Corporate profits are at all-time highs."
Q: What about inflation? How does that affect the record?
A: When inflation is taken into account, the S&P 500 is still far from its peak. On March 24, 2000, the index hit 1,527. With inflation added to it, that peak works out to 2,065, according to calculations from JPMorgan Chase.
Q: The Dow just hit a record three weeks ago. What's the difference between the two indexes?
A: The Standard & Poor's 500 index takes a company's market value into account. That means that the most valuable companies in the index - Exxon Mobil and Apple - can move the index more than smaller companies like Avon Products and Hormel Foods. A $1 move in Exxon Mobil moves the S&P more than a $1 move in Hormel.
In contrast, the Dow takes a company's stock price into account. Every change of $1 in any of the 30 Dow stocks moves the index by the same number of points, roughly seven. That gives more sway to companies with higher stock prices. It's easier for a $100 stock to rise $1 than it is for a $10 stock.
As a result, the oil giant Exxon Mobil, with a market value of $406 billion, has less influence on the Dow than Chevron, with a value of $233 billion. Why? One share of Exxon sells for $91, while one share of Chevron sells for $120.
Q: Why should I care about what happens to the S&P 500?
A: If there's a U.S. stock mutual fund in your retirement account, it's probably tied to it.
More funds and more money chase after the S&P 500 than any other U.S. stock index. It's the most widely used yardstick for money managers who pick and choose stocks, as well as for index funds, which simply try to mirror an index, says Michelle Swartzentruber, a research analyst at Morningstar. Some 1,359 funds worth $2.8 trillion track the S&P.
The Dow, by contrast, has six followers worth $142 million.
The index is also popular with investors in exchange-traded funds, baskets of securities that trade like stocks. The largest ETF is the SPDR S&P 500, with $131 billion.
Q: Which index do professional investors follow?
A: For anyone working in financial markets -- professional investors, academic types -- the S&P 500 is the main barometer. It's built to mirror the overall stock market, and it's a measure of how well Corporate America is doing.
"Anyone in our business uses the S&P," Luschini says. "Nobody uses the Dow. On any given day, if you stopped me on the street to ask where the Dow was trading, I couldn't tell you. But I'll generally know the number for the S&P."
Q: Why did it take the S&P 500 longer than the Dow to reach a new record?
A: Mainly, the answer is math. A single actor plays a larger role in a cast of 30 than a cast of 500. The Dow's success owes a lot to one stock - IBM - because of its high price. Since March 9, 2009, when IBM closed at $83, its stock has gained 155 percent, shouldering a tenth of the Dow's gain, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
It's a different story in the S&P 500, where Big Blue's $237 billion market value gives it less than 2 percent of the index. Even mighty IBM isn't strong enough to carry 500 companies worth $14 trillion.
Q: What about Apple's recent struggles? Has its stock held the index back?
A: Yes. Apple is just one of 500 companies in the index but it's still big enough, and its slump bad enough, to weigh it down. Since crossing above $700 last September, Apple's stock has dropped 37 percent to $442.
Silverblatt calculated that if Apple had been trading at $650, the S&P 500 would have topped its all-time high on March 5, the same day the Dow cleared its old mark.
Q: Which industries have powered the index up since 2009?
The answer shows just how nervous everybody was during the financial crisis. Back then, investors ditched banks, along with stocks from companies selling cars, jewelry and other goods that people stop buying when they're worried about money. Since March 2009, banks have more than tripled, gaining 212 percent, according to FactSet data. Those so-called consumer-discretionary companies have gained even more.
Q: Which S&P 500 company has done best since the market bottom?
A: Wyndham Worldwide, a manager of hotels and resorts, has had the best run over the past four years - by far. Wyndham's stock has soared 2,130 percent since 2009, according to FactSet. That surge tracked the company's turnaround. In 2008, Wyndham lost $1 billion. Over the past year, it has posted a $400 million profit, reflecting the rise in vacation travel. and popularity of its time shares. In second place sits CBS, the broadcasting company, with a gain of 1,500 percent.
Q: What about the losers?
A: Some companies are in worse shape than during the dark days of the financial crisis. First Solar has lost 75 percent since March 2009. The once-popular maker of thin-film solar panels has faced a growing crowd of competitors and prices for solar panels have plunged.
Apollo Group comes in a close second, dropping 74 percent. Scandals at for-profit schools led to tighter government scrutiny of the industry, and enrollment subsequently fell at the company's University of Phoenix.
Q: How do companies get into the 500 club?
A: A team of Standard & Poor's economists and analysts known as the Index Committee manages the group.
The committee aims to have the index represent the makeup of the overall market, Silverblatt says, not to pick the 500 largest companies. For instance, utilities could surge in popularity someday and overtake banks in their share of the market. The index would then be tweaked to reflect the new rankings, he says. The committee would probably drop one lightweight bank and replace it with a growing utility.
Q: How many companies have been removed from the S&P 500 in the past four years? Why?
A: Since March 2009, a total of 79 companies have dropped out. When companies leave, it's often because they have been bought by another member of the 500 club, Silverblatt says. But S&P will also pull a company if its market value has shrunk drastically, or if it doesn't have enough publicly traded shares.
Some of the missing companies are well-known, mighty giants whose fortunes have faded. Sears, Roebuck was in the index at the beginning in 1957. But last August, Sears Holdings lost its spot to the chemical maker LyondellBassell.
On Dec. 17, 2010, Eastman Kodak and The New York Times Co. were unseated by Newfield Exploration and F5 Networks.
Q: How long has the index been around?
A: Since March 4, 1957. That's when S&P took its indices that tracked industry groups -- transportation, utilities and financials -- and merged them with the old S&P 400, according to Silverblatt. It gained in popularity throughout the 1960s, as researchers began applying the tools of statistics to politics, health care and, eventually, markets.
Compared with the Dow, which launched in 1896, it's still an upstart.
Q: What are other highlights and lowlights for the S&P?
A: The index started at 44.06 on March 4, 1957 and broke the 1,000 mark on February 2, 1998.
Its worst day was Oct. 19, 1987, Black Monday, when financial markets crashed in a wave of panic selling. The index plunged 21 percent, losing 57.86 points, to end the day at 224.84.
Measured in points, the biggest one-day loss came during the height of the financial crisis, Sept. 29, 2008. The index dropped 106.62 points that day to close at 1,106.39, a loss of 9 percent.
Its best day came exactly two weeks later on Oct. 13, 2008, when governments in the U.S. and Europe announced sweeping plans to shore up the battered global financial system. The index rose by 104.14 points, or 12 percent, to end the day at 1,003.35. That's the biggest one-day jump in points and percentage.