NEW YORK • The stock market notched another record.
Three weeks after the Dow Jones industrial average blew past its all-time high, the broader Standard & Poor’s 500 index joined it in the history books.
The S&P 500 gained six points on Thursday to close at 1,569.19, topping its previous peak by four points. That previous record stood since Oct. 9, 2007.
The S&P 500 may generate fewer headlines than the Dow, its older stock-index sibling, but it’s the market gauge favored by professional investors. That’s largely because it covers a wider swath of companies — 500 as opposed to 30.
Like the Dow, the S&P 500 has now recovered all of its losses from the Great Recession and the financial crisis that followed. Investors who held on and put their dividends back into the market have fared even better. An investment of $10,000 in the S&P 500 on Oct. 9, 2007, would be worth $11,270 today.
Anyone brave enough to put $10,000 in the S&P 500 at the market’s bottom on March, 9, 2009, would have $25,200.
Q: What’s driving the stock market to a new high?
A: Since the S&P 500 bottomed out in March 2009, the economy has pulled out of a recession and started growing. Companies are making record profits quarter after quarter, they’re hiring in greater numbers, and the housing market is finally recovering. The economy has expanded for 14 quarters in a row.
The Fed has helped, too. By keeping interest rates near record lows, the central bank has encouraged people to move money out of savings accounts that pay next to nothing and into stocks and other investments.
Pundits often argue that the Fed’s efforts have created the illusion of a strong stock market. But that argument misses the big picture, says Mark Luschini, chief investment strategist at Janney Montgomery Scott. People buy a stock to own a share of the company’s profits, and those profits keep climbing. Earnings for the S&P 500 hit $103 per share last year. That’s up from $84 in 2007 and $61 in 2009.
"This isn’t all smoke and mirrors," Luschini says. "Corporate profits are at all-time highs."
Q: What about inflation? How does that affect the record?
A: When inflation is taken into account, the S&P 500 is still far from its peak. On March 24, 2000, the index hit 1,527. With inflation added to it, that peak works out to 2,065, according to calculations from JPMorgan Chase.
Q: The Dow just hit a record three weeks ago. What’s the difference between the two indexes?
A: The Standard & Poor’s 500 index takes a company’s market value into account. That means that the most valuable companies in the index — Exxon Mobil and Apple — can move the index more than smaller companies like Avon Products and Hormel Foods. A $1 move in Exxon Mobil moves the S&P more than a $1 move in Hormel.
In contrast, the Dow takes a company’s stock price into account. Every change of $1 in any of the 30 Dow stocks moves the index by the same number of points, roughly seven. That gives more sway to companies with higher stock prices. It’s easier for a $100 stock to rise $1 than it is for a $10 stock.
As a result, the oil giant Exxon Mobil, with a market value of $406 billion, has less influence on the Dow than Chevron, with a value of $233 billion. Why? One share of Exxon sells for $91, while one share of Chevron sells for $120.
Q: Why should I care about what happens to the S&P 500?
A: If there’s a U.S. stock mutual fund in your retirement account, it’s probably tied to it.
More funds and more money chase after the S&P 500 than any other U.S. stock index. It’s the most widely used yardstick for money managers who pick and choose stocks, as well as for index funds, which simply try to mirror an index, says Michelle Swartzentruber, a research analyst at Morningstar. Some 1,359 funds worth $2.8 trillion track the S&P.
The Dow, by contrast, has six followers worth $142 million.Next Page >
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