Among the indices that evaluate the performance of stock markets worldwide. One of the most prominent is one that we know as the S&P 500 index, also known as Standard & Poor’s 500. This index evaluates the performance of the shares on the New York Stock Exchange. For many analysts, the S&P 500 is the most representative, even more than the Dow Jones Industrial Average, which along with the Nasdaq put together the 3 most relevant indices.
Standard & Poor’s
Responsible for this index is the Standard & Poor’s Financial Services LLC. The financial service company. This international company is in charge of developing several stock indices, worldwide, in association with different stock exchanges. Also, it provides credit risk rating services, an area in which it is one of the most important in the world, along with Moody’s Investors.
In 1860, by the initiative of Henry Varnum Poor, starts to publish a yearbook with detailed information of the railways of the United States. In 1868, with his son, he decided to establish H.V. and H.W. Poor Co. that started with detailed information on the railway companies’ performance.
In 1906, it was established a company focused on providing financial information, mainly related to rail services, Standard Statistics Bureau, and in 1941 both companies are going to merge to create Standard & Poor’s Corp. This company will be acquired in 1966 by The McGraw Hill.
The S&P 500 index
The Standard & Poor’s first appeared in 1923. At that time the index assessed to 233 companies listed on the New York stock market.
It was in 1957 that the S&P 500 began to be calculated as we know it today. One of the main advantages that analysts attribute to it is the diversity of sectors that it represents. But basically, the S&P 500 is composed of 400 industrial companies, 20 transport companies, 40 financial services companies, and 40 public utility companies.
Selection criterion to enter the S&P 500
A committee runs the selection of the companies that comprise the index called the S&P Index Committee – which is responsible for periodically assess entirely different criteria from the rest of the indexes in force, the performance of companies.
The highlight is the weighting method of this index, which is based on the market capitalization of each of the companies that comprise it. This makes it a more sensitive index to the markets’ performance. That is why it is followed by many analysts, and they consider it the most faithful reflection of the best stock market performance.
The criteria that the committee takes into consideration when evaluating are: first, S&P does not assess small or medium enterprises. They must have a market capitalization of more than 4 billion dollars. Companies must offer their shares publicly in the New York Stock Exchange or the NASDAQ. The monthly volume of shares traded cannot be less than 250 thousand.
The representativeness of the company in the sector to which it belongs is also valued.
During the dot com companies bubble, the S&P 500 reached 1552.87 points, but after the collapse of this financial bubble, the index lost almost half of its score.
Standard & Poor’s and the mortgage crisis
The analysts’ consideration of the S&P 500 index, due to its sensitive and straightforward weighting method, was thought to be as contradictory with the high level of criticism that its developer company has received for its performance during the subprime mortgage crisis.
The truth is that before the outbreak of the real estate bubble, in 2007, Standard & Poor’s firm, in its role as a risk rating agency, had given a high credit rating to banking entities, including Lehman Brothers. After the outbreak of the crisis, the overall responsible of the firm, when assessed by the United States Congress, argued that the financial collapse had “surprised everyone.” This contrasted with the point made by several economists, among them Nouriel Roubini, who had been warning about the dire consequences of the financial collapse from subprime mortgages.
Despite this, the S&P 500 index remains one of the most important for tracking the US stock market development.