S&P 500 index

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. 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). . In 2012, over $1.3 trillion dollars was invested in S&P 500 index investment products.

Historical returns
The following table and charts provide historical total return data for the S&P 500 index from 1923 to the latest year. 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.

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. .

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.


 * As the recent 2008 market downturn indicates, equity asset classes tend to become more positively correlated during bear markets.