S&P 500 index

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The S&P 500 index is a market weighted index of 500 U.S. stocks, selected and monitored by Standard and Poors. The index dates back to 1923, when Standard and Poors introduced an index containing 233 companies. The index of 500 stocks was introduced in 1957. [1] The S&P 500 index measures returns of the large cap segment of the U.S. stock market. It comprises 75% of the U.S. market capitalization of stocks.

S&P 500 index funds

Vanguard was the first investment company to offer an S&P 500 index fund (1976).[2]. In 2012, over $1.3 trillion dollars was invested in S&P 500 index investment products. [3]

Historical returns

The following table and charts provide historical total return data for the S&P 500 index from 1923 to the latest year. [4] Charts 1 through 4 are part of the embedded spreadsheet (S&P 500 index tab).

Chart 1. graphically illustrates the year to year variation in index returns. The annual returns also highlight the major bear markets in the index history, including the Great Depression; the 1973-1974 market; the 2000-2002 market; and the 2008 market.

Since real returns are of primary importance to long term investors, Charts 2-4 examine index returns and inflation. Chart 2 shows the annual relationship between inflation and index returns; Chart 3. graphically illustrates the year to year variation in inflation-adjusted annual returns. Chart 4. illustrates the long term cumulative return of the index (assuming an initial $100 dollar investment), in both nominal and real values.

Table.S&P 500 Returns

(view Google Spreadsheet in browser or download as xls, ods, or pdf)

Correlation

The S&P 500 index, measured by annual returns, has exhibited, on average, positive correlation with broad equity indexes (the MSCI EAFE index of developed market stocks and the MSCI Emerging Market stock index), and low positive correlation with the US Barclays Aggregate Bond index, when viewed over the full span of measurement periods. [footnotes 1].

The periods of measurement break down as follows:

  • S&P 500- MSCI EAFE 1970 - current
  • S&P 500- MSCI EM 1989 - current
  • S&P 500- Barclays US AGG bond 1976 - current

For an investment portfolio, the advantages of combining asset classes with consistent low correlations are an increase in diversification and a potential lowering of portfolio volatility.

However, correlation between asset classes shifts constantly, as asset classes become more and less correlated with each other over time. The table below shows the range of correlations over rolling five year periods (annual returns) for each pair of assets.

The S&P 500 index has displayed the following tendencies:

  • Over the 1970 - 2012 span the US index and international index returns have trended towards higher correlations. Goetzmann/, Li, and Rouwenhorst note that equity markets have historically grown more positively correlated during periods of greater integration of international economies (as in the late nineteenth and late twentieth centuries). The MSCI EAFE index has existed over a period marked by increasing globalization of market economies. [5]
  • As the recent 2008 market downturn indicates, equity asset classes tend to become more positively correlated during bear markets. [6]


Table. S&P 500

(view Google Spreadsheet in browser or download as xls, ods, or pdf)

Notes

  1. The MSCI EAFE index provides data starting in 1970. The MSCI Emerging Market Index has an inception date of December 31,1988. The Barclays U.S. Aggregate Bond Index has an inception date of January 1, 1986, with backdated data going back to 1976. Historical returns for the S&P 500 index and the 10 yr US Treasury Bond go back to 1928. The following table provides historical correlations between these two asset classes:
    S&P 500 - 10 yr US Treasury Bond correlation

    (view Google Spreadsheet in browser or download as xls, ods, or pdf)

See also

References

  1. History of the S&P 500 Index. Retrieved 16 April 2012.
  2. Bogle, John."How the Index Fund Was Born". Wall Street Journal (9/23/2011). Retrieved 16 April 2012
  3. S&P|S&P 500|Americas. Retrieved 16 April 2012.
  4. S&P 500 index data source comes from Annual Returns on Stock, T.Bonds and T.Bills: 1928 - Current, Damodaran Online; inflation data comes from Consumer Price Index 1913 -, Minnesota Federal Reserve]. Retrieved 1 April 2012
  5. Goetzmann, William N., Li, Lingfeng and Rouwenhorst, K. Geert, Long-Term Global Market Correlations (November 2001). NBER Working Paper No. w8612. Available at SSRN: http://ssrn.com/abstract=291287.
  6. The pros' guide to diversification, Fidelity

External links