In the 500th episode of Money for the Rest of Us, we focus on the S&P 500 Index. How has the index changed, and why have U.S. stocks performed so well? Will U.S. stocks only return 3% in the next decade, as Goldman Sachs predicts.
We also discuss major themes covered on Money for the Rest of Us over 500 episodes and what are our plans for the future. Thanks for being a part of Money for the Rest of Us over the past decade.
Show Notes
Select Sector Indices Consultation on Constituent Weightings Calculations – Results—S&P Global
What Does an Election Year Mean for the Market?—S&P Global
Decade of Big S&P 500 Gains Is Over, Goldman Strategists Say by Sagarika Jaisinghani—Bloomberg
David Stein LinkedIn Post—LinkedIn
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein, and today is episode 500. It’s titled, “The S&P 500 Index and the Decade Ahead.”
We were talking at Money for the Rest of Us what should we do for the 500th episode, and couldn’t really come up with anything, because we don’t just want to sit back and talk about what we did. We’d rather talk about what’s going on now.
Brett, though, had the suggestion “Well, why don’t you talk about the S&P 500 Index on our 500th episode?” and that’s what we’re going to do because there’s a lot of elements within the S&P 500—how well it’s performed, how it’s constructed, where things are, how it might do going forward—that very much tie into the themes that we’ve talked about over the years on Money for the Rest of Us. I’ll certainly talk about the show a little bit, provide some perspective later in this episode, but let’s first take a look at the S&P.
History of S&P
Standard & Poor’s organization was formed in 1941 through a merger of Standard Statistics and Poor’s Publishing. The S&P 500, which is a measure of the 500 largest stocks in the U.S. by market capitalization or size—that was launched March 4th, 1957. It was the first index to use a computer-based calculation to track the performance. You need a computer to figure out the weights, which is why earlier indexes, I believe, generally were price-weighted, because it was easier to calculate. The Dow Jones Industrial Average, for example, was a price-weighted index. The S&P 500 replaced an earlier 90-stock composite that the S&P had.
S&P 500 Performance
Now, if we think back to how the S&P 500 has done since the first episode of Money for the Rest of Us, that was May 16th, 2014. Since then, through yesterday, November 4th, the S&P 500 index has returned 267% cumulative. That’s 13.2% annualized. We’re using the iShares Core S&P 500 ETF as a proxy.
The measure of outperformance compared to non-U.S. stocks, as represented by the Vanguard Total International Stock ETF—that ETF has returned 4.5% annualized. In the 10 years we’ve been doing the Money for the Rest of Us podcast, U.S. stocks have outperformed non-U.S. by more than 8 percentage points annualized. Outside of the U.S, the largest country by market capitalization is Japan, followed by United Kingdom, and China. But one of the things that has happened with that strong outperformance is the U.S. stock market has gotten to become a larger and larger percentage of the global stock market.
For example, in early 2015, the U.S. made up 52% of the MSCI All Country World Index. This is an index that includes both developed and emerging markets. And at the time, in early 2015, the largest sector in the global stock market was financials at 21%, followed by information technology at 14%.
Ten years later—this is as of the end of October—the U.S. makes up 65% of the global stock market, again, as measured by size or market capitalization. The market capitalization of a stock is the number of shares outstanding times the price. So the U.S. has grown 15 percentage points in terms of the size of its stock market relative to the rest of the world.
The sectors have also changed. Information technology now comprises 25% of the global stock market, almost double what it was 10 years ago. And financials have fallen from 21% down to 17%. With the U.S. making up 65% of the global stock market, that is the highest weighting since the late 1960s, early 1970s, during what was called the nifty-fifty era, where there were 50 very large U.S. stocks by market capitalization that were dominating both the U.S. market and the global stock market.
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