History of the Standard & Poor's 500

Introduction [back to top]

The Standard & Poor's 500 is a market-value-weighted index (shares outstanding multiplied by stock price) of 500 stocks that are traded on the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), and the NASDAQ National Market System. The weightings make each company's influence on Index performance directly proportional to that company's market value. It is this characteristic that has made the Standard & Poor's 500 Index the investment industry's standard for measuring the performance of actual portfolios. With dividends reinvested, the total return on the S&P 500 Index for 1993 was 10.08%.

Companies selected for the Standard & Poor's 500 Index are not chosen because they are the largest companies in terms of market value, or sales, or profits. Rather, the companies included in the Index tend to be representative of important industries within the U.S. economy and many also are the leaders of their industries. When the U.S. Department of Commerce developed its Index of Leading Economic Indicators in 1968 to signal potential turning points in the national economy, it chose the S&P 500 Index as one of the components.

U.S. DEPARTMENT OF COMMERCE 11 LEADING ECONOMIC INDICATORS [back to top]

1. Average weekly hours of production workers-manufacturing

2. Average weekly initial claims for state unemployment insurance

3. Manufacturers' new orders, consumer goods and materials, in 1982 dollars

4. *Vendor performance - slower deliveries diffusion index

5. Contracts and orders for plant and equipment

6. Building permits

7. Change in manufacturers' unfilled orders-durable goods industry

8. Change in sensitive materials prices

9. Index of S&P 500 common stock prices

10. Money supply: M2 in 1982 dollars

11. Index of consumer expectations

* A month-to-month percent change index gauging the slowest rate of speed of deliveries as reported to the National Association of Purchasing Management by participating:

The origins of the Standard & Poor's 500 Index go back to 1923, when S&P presented a series of indices that included 233 companies grouped into 26 industries. In 1957 S&P introduced the 500 and has expanded its representation over the years to encompass approximately 90 specific industry groups. Four major industry sectors have also been developed: Industrials, Utilities, Financials, and Transportation. The number of companies in each major industry sector has been allowed to "float" since 1988 in order to enable the S&P Index Committee to react efficiently to an increasingly dynamic economy and stock market.

In contrast, the Dow Jones Industrial Average (DJIA), which was first published in 1884, is based on a narrow set of stocks and a different calculation methodology. The DJIA is a price-weighted average tracking the stock performance of 30 blue chip companies. While the Dow Jones Industrial Average is adjusted for stock splits and referred to as an index in the financial media, the DJIA measures average price movement only, without regard to market value. As a result, the higher-priced stocks within the DJIA often have a greater effect on the DJIA Index than the lower-priced ones. A large change in the price of just one DJIA component often may account for more than 50% of the Dow's daily price movement; that is unlikely to happen with the S&P 500 Index.

To illustrate further, consider the effects of a hypothetical $20-per-share drop on April 29,1994, in the price of General Electric (GE), a company that has been in both indices since their respective inceptions. GE closed that day at 95.125; the DJIA closed at 3681.69, and the Standard & Poor's 500 closed at 450.91. The Dow's divisor on that date was 0.42025523. Divide that figure into $20, and it translates into 47.59 Dow points, or a 1.29% drop in the DJIA. GE had the largest capitalization of any stock in the S&P 500 on that date. Its $81.135 billion in market value accounted for 2.52% of the S&P 500's total capitalization of $3.221 trillion. GE had 852.935 million shares in the Index, so a $20-per-share drop in GE's price would cut the total capitalization by $17.059 billion. The Divisor for the S&P 500 on April 29 was 7143.6506. Divide that into the change in GE's capitalization, and the Index would fall by 2.38 points to 448.53, a decline of 0.53%, or about 58.9% less than the percentage change in the Dow.

Until recent years, the DJIA was the only stock market indicator widely quoted by the general news media. The Standard & Poor's 500 was rarely mentioned in news summaries, although the Index was the most common benchmark used by investment professionals to measure the performance of their portfolios. That use of the S&P 500 as the proxy for the overall stock market predates the widespread adoption of the Capital Asset Pricing Model (CAPM) in the 1970s. By convention, the S&P 500 Index was used as the market portfolio in tests of the CAPM. Betas of individual stocks were then calculated against the S&P 500 Index, which by definition had a portfolio beta of 1.00. As the amount of money invested in the equity markets grew, the need for a broad market indicator that reflected how people actually invest in equities was needed. Today the S&P 500 is far more widely reported by the media. Also boosting the recognition of the S&P 500 has been the growth of Index funds and the many Index-linked derivative financial instruments.

The S&P MidCap 400 Index, which was launched on June 19, 1991, is a logical extension of the Standard & Poor's 500. It tracks the stock price movement of 400 companies with mid-size market capitalizations, primarily ranging from $300.0 million to $5.2 billion. The calculation methodology and management of the S&P MidCap 400 Index is exactly the same as that of the S&P 500, allowing properly weighted positions in both indices to be combined to expand the potential indexable U.S. investment universe.

In May 1992 the S&P/BARRA Growth Index and S&P/BARRA Value Index were introduced. The 500 component stocks in the Standard & Poor's 500 were divided into two groups, growth or value, based on their price-to-book ratios. Thus, these new style indices provide appropriate benchmarks for investors following either a growth or value approach to investing.

History [back to top]

The introduction of the Standard & Poor's 500 Index was made on March 4, 1957. The objective is to find a more perfect means of measuring the performance of the U.S. stock market. In 1923, Standard & Poor's introduced to the financial world a new methodology for evaluating stock performance called the "base-weighted" aggregative technique, which, back then, was not easily implemented. As explained in the March 11, 1957, edition of The Outlook:

The Standard "500" is based on the scientific weighting formula pioneered by Standard & Poor's in this field. The price of each stock is multiplied by the number of shares outstanding, to give the aggregate current value of investments in the 500 issues. This aggregate is then related to a standard (1941-43) market base, which is given a value of 10.

Using this method, it is possible to make absolute corrections for splits and similar capital changes without affecting the continuity of the index or the relative importance of the stock to the over-all index. Thus the Standard "500" avoids the distortions created in the popular "averages" by splits, rights, or stock dividends.

This methodology made it possible for investment professionals to directly compare the performance of their stock portfolios with a stock market indicator that measured the changes in value of a market portfolio. Until 1923, the only stock market indicator available was the Dow Jones Industrial Average. Although popular and easy to understand, the DJIA did not address that need of the professional investor.

The forerunner to the S&P 500 Index, which was Standard & Poor's first broad market indicator, contained a total of 233 stocks divided into 26 industry group indices. Both the 233 Composite Index and the industry group indices were calculated for publication once a week.

In 1928 Standard & Poor's realized the need to disseminate its market indicator information more frequently. Instead of trying to calculate the 233 Composite on an hourly or even a daily basis, which would have been difficult to do in an era before sophisticated calculators or computers were available, Standard & Poor's created a more manageable subset of stocks. This new index was the first daily, and then the first hourly index published by Standard & Poor's. Comprised of 50 Industrial, 20 Railroad, and 20 Utility stocks, it became known as the S&P 90 Stock Composite Index.

Meanwhile, Standard & Poor's continued to calculate its original 233 Composite and 26 industry group indices on a weekly basis. In fact, Standard & Poor's continually added more companies to the original 233 in order to create new industry group indices. In 1941 there were 416 companies in 72 industry groups. By 1957 the 416 had become 500 companies. However, the S&P 90 Stock Composite still remained the only up-to-the-hour Standard & Poor's stock market indicator. Once computer technology developed, it became possible for the 500 Composite to be calculated and disseminated on a minute-by-minute basis. Historical prices for the new hourly 500 Composite were linked to the 90 Stock Composite to provide a daily record back to 1928.

The new S&P 500 Composite Stock Index consisted of 425 Industrials, 60 Utilities and 15 Railroads. All 500 stocks were listed on the New York Stock Exchange-as had been the case for the prior Standard & Poor's Indices-and constituted approximately 90% of the value of all common shares listed on the NYSE in 1957. The new 500 had a base period of 1941-43 set equal to 10 to which all future market values of constituent stocks would be compared. A base of 10 may seem a bit unusual, but that put the December 31, 1956, value of the Index at 46.67, which was very close to the average price per common share of $49.12 on that date.

While the base period remains unchanged today, the current S&P 500 Index is the same only in name and number of companies. In 1976, responding not only to technological advancements but also to the development of the capital markets, the configuration of the 500 was changed to 400 Industrial, 40 Utility, 40 Financial and 20 Transportation stocks. In addition, Over-The-Counter (OTC) and American Stock Exchange issues were included in the Index for the first time. Financial stocks were added to the Index because of their growing importance to the U.S. economy as well as technological advances that allowed their stock price performance to be more readily calculated. Many of the banks and insurance companies included in the Index were traded in the Over-The-Counter market. Previously, it had not been possible to calculate price performance for OTC stocks. Also, because the railroad companies no longer played the dominant role they once did in the U.S. economy, they were joined by airlines, air freight and trucking companies to create the Transportation industry segment.

In 1988 the 500 underwent another major alteration. The major industry sector structure was relieved of its numerical constraints. Although all companies in the 500 would still be classified as S&P Industrials, Utilities, Financials, or Transportation, the number of companies in each major industry sector was no longer limited to the 400-40-40-20 configuration. The reason for relaxing the fixed-number structure was to allow the true market-value representation of the entire stock market to be more easily modeled. The fixed numbers did not permit Standard & Poor's to react efficiently in what was becoming an increasingly dynamic economy and stock market. The merger mania of the 1980s contributed substantially to dramatic shifts in market-value representation of the various industry sectors within the stock market. Standard & Poor's adopted this flexible policy to allow the number of companies within the groups to "float" in order to make the 500 a better indicator.

History Highlights [back to top]

1923 -- Standard de Poor's develops its first stock market indicators. The new stock indices cover 26 industry groups and 233 companies. Also, S&P introduces base-weighted aggregate technique to gauge stock market performance.
1926 -- Standard & Poor's creates a 90 Stock Composite Price Index, comprising 50 Industrials, 20 Rails and 20 Utilities. The new composite has a base period of 1926=100 and is calculated and published weekly. Historical values are available going back to 1918. The "233" and the industry group indices are re-based to 1926=100 and are calculated and published weekly.
1928 -- Standard & Poor's 90 Stock Composite Price Index is calculated and published daily.
1941 -- The "233" grows to 416, comprising 72 industry sub-groups. The new "416" and the 90 Stock Composite are re-based to 1935-39=100
1957 -- The "416" becomes the Standard & Poor's 500 Composite Stock Price Index. Thanks to technological advancements, computers are introduced and permit the "500" to be calculated and disseminated at one-minute intervals throughout the trading day. In order to create a lengthy historical time series, the new "500" is linked to the 90 Stock Composite Price Index-daily S&P 500 Index prices become available back to 1928. The original "233" and "90" stock indices have evolved into the modern "500". The "500" now consists of 425 Industrials, 60 Utilities and 15 Rails, and has a base period of 1941-43=10.
1976 -- Effective July 1, the "500" is restructured to become a composite consisting of 400 Industrials, 40 Utilities, 40 Financials and 20 Transportation stocks. Up to this point, only New York Stock Exchange issues have been included in the "500". The restructuring introduces Over-The-Counter and American Stock Exchange issues into the computation.
1983 -- Effective November 30, Standard & Poor's revises the "500" to reflect the American Telephone & Telegraph (AT&T) divestiture. The seven regional telephone companies spun off by AT&T are added to the 40 Utilities group, replacing two electric, two gas and three independent telephone utility stocks. Parent AT&T is kept in the miscellaneous category of the 400 Industrials group.
1986 -- On June 13, Standard & Poor's begins disseminating S&P 500 Index values on a 15-second interval basis versus the previous one-minute calculation.
1988 -- Effective January 1, Standard & Poor's calculates the Total Return -- return including reinvestment of dividends -- on the S&P 500 Index on a daily basis. Previously total return numbers were only available based on monthly reinvestment.
1988 -- Effective April 6, the S&P 500 is restructured to remove the "limits" set on the four major industry groups. As a result, from this point on, the 400 Industrials, 40 Utilities, 40 Financials and 20 Transportations are allowed to "float". Substitutions can be made between categories, permitting S&P to respond more quickly to shifts in representation of major market sectors.
1989 -- On February 8, Standard & Poor's removes RJR Nabisco from the S&P 500, reflecting the completion of the largest corporate takeover in U.S. history. RJR's huge market value of $22 billion is replaced by $2.3 billion First Union, a regional bank based in North Carolina.
1989 -- Effective October 1, Standard & Poor's begins its "preannouncement" policy. Whenever possible, S&P will announce additions and deletions up to five business days in advance of the actual change in the Index. The policy change is designed to ease order imbalances that typically happen to stocks just added to the 500.
1992 -- In May 1992 S&P/BARRA Growth & Value style indices are introduced. Based on price/book ratios, these indices divide the S&P 500 Index into two mutually exclusive indices representing a 50/50 split of the 500's market value according to price/book characteristics.

Objective Restated [back to top]

As noted above, the primary objective of the Standard & Poor's 500 Index is to be the performance benchmark for the U.S. equity markets. On December 31, 1993, the Index had a market value of $3.31 trillion, representing 68% of the market value of the publicly traded equity securities in S&P's internal database of more than 5,000 companies, as well as 74% of the aggregate market value of the common stocks traded on the New York Stock Exchange.

As mentioned before, it is important to note that the Standard & Poor's 500 does not contain the 500 largest companies or most expensive stocks traded in the United States. While many of the stocks in the Index are among the largest, it also includes many relatively small companies. This is because the 500 is constructed from the bottom-up by industry group. S&P identifies important industry groups within the U.S. economy and then allocates a representative sample of stocks within each important industry group to the S&P 500. As of December 31,1993, the S&P 500 had a total of 88 industry groups. The industry groups are, in turn, grouped into four major industry sectors: Industrials, Utilities, Financials, and Transportation. As of the end of 1993, there were 381 Industrials, 47 Utilities, 56 Financials, and 16 Transportation stocks in the 500.

The industry groups and the major industry sectors allow the Standard & Poor's 500 to serve as a benchmark for the U.S. equity market as a whole and for individual industry groups and corporations. This has particular relevance in view of the Security and Exchange Commission's (SEC's) new proxy rules, which require a company to compare its stock market performance with a broad stock market index as well as against a narrower group of peers. The SEC has stated that companies in the S&P 500 must use the 500 as their broad benchmark; many companies outside the 500 use it as well. Many also use the S&P industry group sub indices as their respective peer groups.

In addition to maintaining and calculating industry price indices, Standard & Poor's also provides financial data for the industry groups. Balance sheet, income statement, and financial ratio information such as earnings, price-earnings (P/E) ratios, dividends, and dividend yields are available for each industry group, major industry sector and the 500 Composite Index on a monthly basis.

Where to Get More Information on the S&P 500 Index [back to top]

The Standard & Poor's Index Products/Services Group strives to provide the investment community with accurate, timely, and comprehensive information on the S&P 500 Index. During trading hours, the value of the Index is calculated by Automatic Data Processing (ADP) and Bridge Data under a contract with Standard & Poor's. ADP, which is designated the primary calculator, revalues the Index every 15 seconds using prices from its securities transactions feeds. ADP then disseminates the results to its subscribers and to the three exchanges that trade products based on the S&P 500: the Chicago Mercantile Exchange (CME), the Chicago Board Options Exchange (CBOE) and the American Stock Exchange. Bridge Data serves as the back-up source of price quotes.

Because there may be timing differences in how the two price-reporting services receive some of the transactions data used to calculate the Index, their intraday quotes may differ slightly. Their numbers also may vary a bit from the quotes disseminated by the exchanges that trade S&P 500 derivatives under the ticker symbol SPX, the universal symbol for the S&P 500 Index on most electronic quotation services. Most of the electronic news services pick up the Index values from the exchange feeds. However, each day's final closing value of the S&P 500 Index is verified by Standard & Poor's, which has the ultimate responsibility to ensure that the final quotes by the two price vendors match down through the last basis point. Those daily index closing values are published in many newspapers, including The Wall Street Journal , The New York Times , Investor's Business Daily , USA Today , and London's Financial Times . Throughout the trading day, S&P also notifies major news wire services - including the PR Newswire; United Press International; and S&P's own real-time news service, Marketscope - of index values.

Although the New York Stock Exchange, American Stock Exchange, and NASDAQ close trading at 4:00 p.m. New York Time, the final S&P 500 closing value frequently is not available until 4:40 p.m. or later. This is because of the final runoff of last-trade prices from the three exchanges and system checks by ADP. A check of the 500 prices at 4:00, 4:05, 4:15, 4:30, or 4:45 p.m. might reveal minor changes of 1 to 3 index basis points, depending upon closing market activity.

All of the parameters used by ADP and Bridge Data are set by Standard & Poor's, which provides them with the number of shares outstanding to use for each company in the Index as well as the correct Index Divisor to use each day. That information also is critical to index fund managers, who can receive it in real time by subscribing to Index Alert, an electronic service that contains all the tools needed for on-line access and data management. Index Alert covers developments concerning the companies in the S&P Indices, including stock splits, daily dividends, mergers and acquisitions, share issuances and buybacks, corporate restructurings, and total-return data. Index Alert Plus is an add-on service that allows a fund manager to automate the index maintenance process by downloading a file after the close of business that contains the information needed to weight the fund's portfolio properly for the next business day.

The price performance of the Standard & Poor's 500 Index is calculated using quoted Index values. S&P also calculates the total return on the Index, combining price performance and Index dividend income. Daily dividend income is calculated for the Index, assuming that the dividend cash flows are reinvested into the Index portfolio on the ax-dividend date. The total-return calculations are available on a monthly, quarterly, year-to-date, and 12 month-moving-period basis for comparing performance. Daily dividend yields are calculated for each calendar quarter, and an annual earnings estimate is available for the forthcoming year. P/E ratios are calculated on a daily basis using the latest trailing four quarter earnings.

The monthly Standard & Poor's 500 Information Bulletin contains dividends, earnings, total returns, Index Divisor values, and hourly prices for the Index. The report also contains an alphabetical listing of all the companies that were in the Index at the end of the month, including their month-end closing prices, shares outstanding, weights in the Index, and betas relative to the S&P 500 Index. The approximately 90 industry groups in the S&P 500 Index are tracked in the weekly S&P 500 Flash Report, which includes P/E values and yields for the major industry sectors, as well as each day's closing value for the industry groups. The monthly Stocks in the Standard & Poor's 500 Official Series lists the companies in the Index, first according to their industry groups and then in descending market-value order. The report also includes total-return and price-performance statistics on each group, as well as any composition changes that may have happened during the month. The total-return data for the S&P 500 Index are available weekly on a floppy disk in Lotus format. All new subscribers also receive daily history dating back to 1988. Historical monthly total return data also are available as a one-time purchase from the S&P Central Inquiry Department, (212) 208-1199.

The Standard & Poor's Analysts' Handbook, published each August, provides indexed financial data on a fiscal year basis for all of the industry groups in the 500. Balance sheet, income statement, and financial ratio information such as earnings, P/E ratios, dividends, and dividend yields are available for each industry group, major industry sector, and the S&P 500 Composite Index. Updated indexed quarterly data, reported on a calendar year basis, may be obtained by subscribing to the Monthly Supplements to the Handbook.

Historical industry return data suitable to meet the SEC requirements on executive compensation disclosure are prepared by the S&P Index Products/Services Group and distributed by the S&P Compustat Custom Business Unit. For more information on that service, please call Compustat at (303) 930-0819.

Two-page fundamental reports, commonly referred to as "tear sheets" and officially known as Standard & Poor's Stock Reports, are prepared quarterly on each company in the Index by S&P's equity analysts. In-depth investment research reports also are available. (Please see the reader reply cards bound into the back of this Directory.) Overall market analysis is available by subscribing to The Outlook, Standard & Poor's weekly market analysis publication. For information on reports and other publications prepared by the S&P Equity Research Department, please call (212) 208-8786.

The Standard & Poor's Index Committee [back to top]

The Standard & Poor's Index Committee is responsible for the overall management of the S&P 500 Index, as well as the establishment of policy guidelines for all S&P Indices. The Committee's actions ensure that the S&P 500 Index continues to adhere to the objectives and goals originally set for it by Standard & Poor's, ensuring that the Index remains the benchmark for performance measurement of the U.S. equity markets.

The Standard & Poor's Index Committee routinely faces many index management and policy decisions. Some of these can tee extremely complicated and have the potential to affect an enormous dollar amount of investments tied directly, or indirectly, to the S&P 500. This is because of the growth of investments related to the S&P 500, most notably index funds. As one would expect, the Committee is extremely sensitive to the implications of its decisions.

The huge pools of capital indexed to the Standard & Poor's 500 also have increased interest in how the S&P Index Committee operates. In particular, because of the positive price effect on the stock of a company added to the S&P 500, attention has been drawn to the selection process for company replacements, although the decision to include a company in the S&P 500 Index (or any other S&P index, for that matter) does not constitute an opinion on that company's investment potential. The price-effect phenomenon has placed a security burden on the S&P Index Committee.

Two very important facets of the committee's management approach are its independence and objectivity. A company cannot apply for membership in the 500 nor does the Committee contact companies under consideration for Index inclusion. All data used in the selection process is public information. The Committee manages the S&P 500 Index independently from Standard & Poor's other business operations and interests. Furthermore, the Committee itself remains independent of any external constituencies.

Changes in the Standard & Poor's 500 are closely guarded and publicly released only after the markets are closed. The company to be included is notified by a member of the Index Committee at exactly the same time that the selection is announced to the investment world. In October 1989, S&P adopted a preannouncement policy with the goal of alleviating some of the price effect on company replacements. Whenever possible, S&P now announces company replacements up to one week in advance of the actual implementation of the change.

It is important to understand that the S&P Index Committee is flexible in its approach to managing the Index because it is cognizant of the possible price effects caused by changes in the composition of the Index. On the one hand, this means that the Committee does not follow a rigid set of rules that must be obeyed without concern for the effects of its decisions on the market. On the other hand, this flexibility should not imply that consistency is forsaken. There are guidelines on corporate size, industry representation, ownership, liquidity, and other factors that must be considered before a company is added to or removed from the Index. The major reason for the Committee's move to a more flexible management approach is that the pace and complexity of the financial markets have made it virtually impossible for the Committee to neatly categorize all possible corporate actions.

Index Committee Meetings [back to top]

In a typical year, the Committee meets about every month, but it can meet as often as necessary. In addition, three or four major index management policy meetings may be held during the year. The purpose of most Committee meetings is to discuss the current status of corporate actions that will have a direct influence on the S&P 500's composition and/or calculation. Composition changes can arise from mergers, takeovers, bankruptcies, and restructurings of the 500 component companies. Corporate actions that affect the calculation of the Index include special dividends, spinoffs, and recapitalizations.

It is not a simple matter for a company to get approved for inclusion into the 500. Review and discussion of replacement companies is regularly addressed by the Committee. A candidate for the Standard & Poor's 500 undergoes an extensive screening process just to be included in a report for review by the Committee. Once the Committee has had an opportunity to review a replacement company, every attempt is made to find a rationale for not including it in the Index. There have been instances where companies, under review by the Committee for a number of months, have been rejected.

Once a company is approved for inclusion, it joins a candidate replacement pool. Because the timing of a company's removal from the Standard & Poor's 500 cannot always be determined in advance, the Committee develops multiple scenarios for each replacement situation. At times, the Committee has been faced with as many as four or five constituent companies requiring replacements. As with the process for reviewing companies for inclusion, approved candidates may not be added for many months. After they are approved, candidates must undergo a regular reexamination of their suitability for inclusion. It is possible for an approved candidate to be removed from the Index replacement pool.

Complex corporate restructurings can present a major challenge. Undoubtedly, these types of corporate actions, as opposed to takeovers or mergers, can involve the most intensive work on the part of the Committee. With the 500 playing such an important role as the basis for numerous investment vehicles such as index funds and futures contracts, a decision on how a corporate action is accounted for can directly and/or indirectly affect many investors and constituent companies.

With increasing frequency, the Committee has found itself reviewing newly developed equity refinancings and other unique recapitalization plans proposed by investment bankers representing companies in the Standard & Poor's 500. Many of these situations have no precedent upon which the Committee can act, and, in effect, new procedures must be developed and implemented. In special cases, where the potential for significant market impact exists, a press release may be issued and all concerned parties notified. S&P's preannouncement policy has reduced some of the price effects caused by changes to the 500.

The minimization of price effects has become of paramount concern to the Committee and Standard & Poor's in general. The management and calculation of the 500 was never intended by S&P to have market or company-specific impact. After all, the Index was developed and is managed to reflect the market, not to move it. With market acceptance of the S&P 500 as the basis of so many important investment vehicles, the Index Committee's responsibility in managing the 500 has grown commensurately.