History of the S&P 500 Index:
The S&P 500 which is an acronym for Standard and Poor’s Composition was introduced in 1957 as a stock market index to track the value of 500 corporations that are listed in the US stock market.
This index was launched on March 4th, 1957 and it consists of 500 leading companies and covers approximately 80% of the available market capitalization.
The S&P 500 was the first U.S. Market Cap-weighted stock market index. The returns of the S&P 500 are not fixed and it varies a lot from year to year. But in the long run, the average returns of the S&P 500 index generate returns above the inflation.
As of today, the total market cap of the S&P 500 index is $36.12 Trillion.
Index Construction:
Some of the rules considered while constructing the index:
Universe:
All constituents must be U.S. Companies
Eligible Market Cap:
To become the part of S&P 500, companies must have a market cap of USD 12.7 billion or greater.
Public Float:
Companies must have an investable weight factor (IWF) of at least 0.10
Financial Viability:
Companies must have positive earnings over the recent quarter, as well as over the most recent four quarters.
Company Type:
All eligible U.S. common equities listed on the U.S. exchanges can be included. REITs are also eligible for inclusion.
But closed-ended funds, ETFs, ADRs, ADS, and certain another type of securities are ineligible for inclusion.
Liquidity & Pricing:
The ratio of annual dollar value traded to float-adjusted market capitalization should be at least 0.75 and stock should trade a minimum of 250,000 shares in each of the six months of the evaluation date.
Ratio is defined as – the average closing price over the period X historical Volume.
Sector representation:
Sector balance as measured by comparison of GICS sector weight in an index with its weight in the S&P Total market index, with relevant market capitalization range is also considered in the selection of companies for the indices.
Weighting Methodology:
Float-adjusted market cap weighted.
Rebalancing Frequency:
Rebalanced quarterly in March, June, September, and December.
Annual returns of the S&P 500
The below image shows the visual representation of S&P 500 returns from 1926 to 2022.
Returns of the S&P 500 by year
You can see the returns of the S&P 500 by year from 1926 to 2022.
Observations
During these 96 years, the S&P 500 had fallen below 20% a year, 6 out of 96 times which are highlighted in red in the above image.
The S&P 500 had given 19 negative returns (0 to -20%) out of 96 times which are highlighted in brown.
S&P 500 delivered positive returns ( 0 to < 10%) in 14 years out of 96 years which are highlighted in pink shade.
S&P 500 had delivered returns above 10 % to 20% in 21 years out of 96 years which are highlighted in Yellow shade.
S&P 500 had generated returns above 20% a year in 36 years out of 96 years which are highlighted in Green color.
Overall, the returns of the S&P 500 are encouraging! Because the index had delivered 71 positive year returns out of 96.
It also delivered 15 negative years return out of 96 years since 1926.
Positive and negative return percentile:
Over the 96 spans of years, the returns of the S&P 500 fell below 20 percent is 6.25%
S&P 500 had delivered negative returns 26.06% of the time.
S&P 500 had delivered positive returns 73.95% of the time.
Also, the returns of the S&P 500 went above 10 percent 59.37% of the time.
The returns of the S&P 500 went above 20 percent 37.5% of the time.
Return of S&P 500 YTD:
In the above chart, you can see the S&P 500 YTD returns for various periods from 2004 to 2022.
What is S&P 500 YTD returns?
YTD return stands for “Year-to-Date return” and the S&P 500 YTD returns represent the total percentage change in the value of an investment over the current year, starting from the first day of the year up to the current date.
For example, if you invested $10,000 in S&P 500 index on January 1st of this year and its current value the investment would be $11,500 on April 29th, then your return of S&P 500 YTD would be calculated as:
YTD return = (Current value – Initial investment) / Initial investment x 100% YTD return = ($11,500 – $10,000) / $10,000 x 100% = 15%
YTD return can help investors evaluate the performance of their investments over a specific period, and compare it to the performance of other investments or benchmarks over the same period.
What happens to your $1 in S&P 500?
$1 in1926:
If you invested $1 in S&P 500 on Jan 1, 1926, Your $1 would have grown to $303.45 (Price Return, Excludes dividends), with an average return of 7.93%
But the Total return which includes Dividends, In this scenario, Your $1 would have grown to $11,800 with the average annual return of the S&P 500 generating 12.08%
Whoof! So much of a difference between Price return & Total return. That’s the impact of the dividend snowball.
Note: All the above & Below returns were computed till Dec 31st, 2022.
Read more: 7 reasons to follow dividend growth investing strategy
Beginning of World War I:
World War I began on 28th July 1914, What would have happened to your $1 in US stock index?
Your $1 would have grown to $458.62 with an annual average return of 7.58% (Price return alone, excludes dividend)
Your $1 would have grown to $37,616.56 with an annual average return of 12.01% (Total return, includes dividend)
Note: I have considered the investment date as Jan 1 in all scenarios for simplicity’s sake, E.g.: $1 was invested on Jan 1st, 1914.
End of World War I:
World War I came to an end on 11th Nov 1918, What would have happened to $1 invested on Jan 1st, 1919 at the US stock index?
Your $1 would have grown to $488.99 with an annual average return of 7.94% (Price return alone, excludes dividend)
Your $1 would have grown to $29,316.62 with an annual average return of 12.26% (Total return, includes dividend)
Beginning of World War II:
World War II began on 1st Sep 1939, What would have happened to $1 invested on Jan 1st, 1939 in the US stock index?
Your $1 would have grown to $307.07 with an annual average return of 8.39% (Price return alone, excludes dividend)
Your $1 would have grown to $6019.97 with an annual average return of 12.33% (Total return, includes dividend)
End of World War II:
World War II came to an end on 2nd Sep 1945, What would have happened to $1 invested on Jan 1st 1946 at the US stock index?
Your $1 would have grown to $213.03 with an annual average return of 8.54% (Price return alone, excludes dividend)
Your $1 would have grown to $2813.29 with an annual average return of 12.30% (Total return, includes dividend)
Black Monday
Black Monday is the largest unexpected stock market crash that occurred on Monday, Oct 19th, 1987.
Pre-Black Monday Return
Your $1 would have grown to $15.86 with an annual average return of 9.41% (Price return alone, excludes dividend) invested on Jan 1st, 1987.
Your $1 would have grown to $35.23 with an annual average return of 11.89% (Total return, includes dividend)
Post-Black Monday Return
Your $1 would have grown to $15.54 with an annual average return of 9.62% (Price return alone, excludes dividend) invested on Jan 1st, 1988.
Your $1 would have grown to $33.34 with an annual average return of 12.07% (Total return, includes dividend)
Dot com Bubble burst
Between 1995 and its peak in March 2000, the Nasdaq stock market index rose 800%, only to fall 740% from its peak by October 2002, giving up all its gains during the bubble.
Your $1 would have grown to $3.34 where the average annual return of the S&P 500 stands at 7.56% (Price return alone, excludes dividend) invested on Jan 1st, 2002.
Your $1 would have grown to $5.04 where the average annual return of the S&P 500 stands at 9.71% (Total return, includes dividend)
2008 Financial crisis
The global financial crisis was a severe worldwide economic crisis that occurred in the 21st Century, all the Mortgage-backed securities tied to U.S real estate & derivatives linked to it lost value.
Your $1 would have grown to $2.62 where the average annual return of the S&P 500 stands at 8.45% (Price return alone, excludes dividend) invested on Jan 1st, 2008.
Your $1 would have grown to $3.55 where the average annual return of the S&P 500 stands at 10.70% (Total return, includes dividend)
Covid 19
On 20th February 2020, the stock market across the world suddenly crashed after the widespread of Covid 19 virus. It ended on 7 April 2020.
Your $1 would have grown to $1.19 where the average annual return of the S&P 500 stands at 7.90% (Price return alone, excludes dividend) invested on Jan 1st, 2020.
Your $1 would have grown to $1.25 where the average annual return of the S&P 500 stands at 9.70% (Total return, includes dividend)
Observations
All the above events changed millions of people’s fate overnight, but the stock market rewards over the very long run & seems to generate an average rate of return between 7.5% to 9% to its investors.
Disclaimer: This is not investment advice, the article must be consumed for educational purposes only!
Thank You for reading.
