Stop reading the bad news related to coronavirus! We think we need a break once in a while to indulge in the good times, especially if it’s related to your financial well-being.
For those who are interested in knowing how to invest stocks in the United States, there are three main indicators of market movements and the most popular stock: the Dow Jones Industrial Average (DJIA) index, the Nasdaq index, and Standard & Poor’s 500 indexes.
These stocks indexes reflect stock price movements on the stock exchange. Recently, the S&P 500 is causing its impressive recovery during the coronavirus pandemic.
What is the S&P 500 and how big is it?
Based on information from S&P Global, the S&P 500 is the proxy for the U.S. market and it represents about 80% – 85% of U.S. stocks. From a global perspective, the U.S. is one-half of the global stock market, as measured by S&P Global BMI. This really matters because as the U.S. economy grows, it boosts the stock markets of all other countries. Consumer spending is the largest driving factor of the U.S. stock market.
S&P 500 index is from the market capitalization of many companies’ outstanding share prices. The S&P only uses free-floating shares, meaning the shares that the public can trade. The S&P adjusts each company’s market cap to compensate for new share issues or company mergers.
They calculate the index by totaling the adjusted market caps of each company and dividing the result by a divisor. Unfortunately, the divisor is proprietary information of the S&P and is not released to the public.
How does Standard & Poor’s 500 work?
The S&P 500 tracks the market capitalization of the companies in its index. Market cap is the total value of all shares of stocks a company has issued. It does not count those held by control groups, other companies, or government agencies. A committee selects each of the index’s 500 corporations based on their liquidity, size, and industry. It rebalances the index quarterly in March, June, September, and December.
Here are some examples of what kind of companies are in the S&P 500. As of August, 31st 2020, there are 10 largest companies, with a weighted market cap. These companies are Apple Inc., Microsoft Corp., Amazon.com Inc., Facebook Inc.
Many investors are using the S&P 500 as a benchmark. Investors use the S&P 500 to benchmark their individual portfolios. Although this may cause some challenges for small businesses. Like everything else, it has pros and cons, the same as having disadvantages and advantages.
The disadvantages including:
1). Inaccurate measure
Standard & Poor’s 500 is based on large market cap companies and some investors may own a small-cap in their portfolio, making it difficult to measure an accurate return portfolio for the individual investor.
2). Long-term performance measurement
S&P 500 investment strategy work over the long-term, therefore, it’s not possible to measure the company’s portfolio performance over a short period of time.
3). Portfolio benchmark
Although it is good for investors to monitor the portfolio progress of the business, the S&P 500 does not provide a good portfolio benchmark for the individual portfolio performance.
The quarterly rollovers need a commission and slippage. This makes it difficult to keep up with the performance for a long period.
5). Large impact on the index
S&P 500 benchmark index is calculated based on large companies. The first 50 largest companies by market capitalization account for more than half of the index value, thus having a large impact on the calculated index.
6). High fees
To compare the company’s portfolio against the market peers may be expensive for the company for higher fees than the regular index funds available. The management fee can also affect the future value of the company’s portfolio.
7). Sector risk
The risk associated with changes in a particular sector of the economy can greatly affect a diversified portfolio.
For the company to be listed in the S&P 500, it must be in operation for six months after the initial public offering (IPO)
9). Weighted market cap
Some stocks influence the performance index. The stock with the largest owner of the index is used to determine the market capitalization, thus influencing the index performance.
On the contrary, the advantages of Standard & Poor’s 500:
1). Broad view
It has a wide market breadth for the large-cap companies which are included in the index. When using it as a benchmark, it can provide a broad view of the country’s economic health.
S&P 500 allows investing as little as one share making it possible to have a small account that is more appealing as well as encourages low-income earners to invest.
3). Performance benchmark
Many large companies can rely on S&P 500 to compare their performance against the market peers.
4). Frequent updates
The index components are updated on a quarterly basis, providing an accurate investment portfolio based on current economic status.
5). Investment vehicle
Index futures can be used as a long-term investment vehicle which enables the account to handle the daily volatility of contracts earning you more income.
6). Simple investment plan
ETF investment plant is simple, gives dividends, increases performance, and no need to renew the contract since it doesn’t expire.
Speaking of the advantages, the news lately which is quite shocking is about Standard & Poor’s 500 stock index closed at a new all-time high on Tuesday, 18th August 2020 had spread. The benchmark stock index recorded 0.2% on that day at just under 3,390.
Standard & Poor’s 500 at a new all-time high, Why it’s so remarkable?
Investors fear the coronavirus pandemic would destroy economic growth. Impressively, the S&P 500 made a great recovery on March 24th which the index began rising again cause of got a chance to fall recorded in February that last 33 days. The tech-heavy Nasdaq also reached a new high on Tuesday, gaining 81 points, or less than 1%, to 11,211. The Dow remains about 6% below its February high.
The gains in the S&P 500 mean “the 2020 bear market is officially over,” according to UBS Global Wealth Management’s Americas CIO Solita Marcelli. What is a bear market? Based on Weekly S&P 500 index performance 2020, a bear market occurs when the value of a stock market suffers a prolonged decline of over 20 percent over a period of at least two months. The COVID-19 pandemic caused severe concern and sent stock markets on a steep downward spiral.
What makes Standard & Poor’s 500 high possible during the pandemic?
The S&P 500 is driven by capital investment, which has been supported by technology spending by a customer during the pandemic. Because the S&P 500 is a more accurate proxy for the US stock market, while the Nasdaq is a more accurate proxy for the tech sector.
In other words, Amazon.com has roared ahead by nearly 71% since March 24th , Apple nearly doubled in price across the same stretch of time, advancing at an 87% clip, Netflix also gained for similar reasons as many stay-at-homes have done a lot of Netflix-and-chill these past few months. Since March 24th, Netflix stock has increased by nearly 38%.
These tech sectors contributed majorly by many of its products and services have led the way as lockdowns forced consumers to work from home and spend money more online.
Is the increase of S&P 500 align with economic growth?
It is not that simple. In fact, the S&P 500 is not an accurate measure of economic. The stock market is not the economy. It is also commonly believed that the stock market is a good proxy for the economy and an excellent sign of what will happen to it.
Normally stock markets tell us a lot about the economy in which buying and selling shares is a near-instant response to new information. This time there might be a structural reason why the markets appear divorced from reality. Investors could be bidding up stock prices because they have to put their money somewhere, and stocks are the least bad bet.
Broadly speaking, investors can put money to work in five places: stocks, property, commodities, bonds, or money in the bank. Since stock’s price is driven primarily by the company’s ability to generate profits, the S&P 500 will tend to increase as corporate profits rise.
On the other hand, the company’s profits do not always correlate with workers’ income and workers’ economic happiness. Ryan Detrick, Chief Investment Strategist for LPL Financial in email commented that many continue to wonder why stocks are at new highs with 10% unemployment and nearly a million people filing for unemployment claims. The truth is economic data is backward-looking and stocks are looking ahead to a much brighter future.
Why stocks are still rising yet not the economy?
BusinessInsider explains that there are a few reasons why stocks are still rising.
1). The help for American households and business, an extension of unemployment benefits, and more lending to small businesses which is expected to be in the deal. If income support to the economy continues, the market may be willing to look beyond adverse economic outcomes now.
2). The medical news around the coronavirus is a bit of two steps forward, there is plenty of despair in the news with reports of increased hospitalizations. But the news appears to be reasonably positive on vaccine development and other treatments. If a vaccine is widely distributed late this year or early next, life may return to normal a bit sooner than expected. And the rest of the world in dealing with the pandemic is clear in the market as well, since U.S. stocks are underperforming the rest of the world. The U.S. is following, not leading, a global equity rally.
3). Parts of the U.S. are slowing down reopening. Stronger news overseas has helped push the US dollar exchange rate lower, providing a lift, especially to publicly traded firms that derive most of their earnings outside the US.
4). Not U.S. economy is irrelevant, but that the sectors most affected by the disruptions like restaurants, movie theatres, parts of retail, they do not have much significance to the US equity market or the economy for that matter.
The lightning recovery is even more remarkable considering how much the economy is still struggling and how uncertain the path ahead remains. Millions of Americans are continuing to get unemployment benefits, and businesses across the country are still shutting their doors. COVID-19 continues to seep throughout the world, with more than 5.4 million known cases and 170,000 deaths in the United States alone.
Since S&P 500 near at all-time high, optimism has grown on hopes for a vaccine because following a market plunge in March, as the pandemic brought much of the U.S. to a standstill. Several investors may have been unfazed by the sputtering economy, but still, many investors expect a vaccine for COVID-19 to emerged by the first quarter of 2021, potentially allowing consumers and businesses to resume their normal activities.