Why the Benchmark Keeps Rising

The S&P 500 is without doubt the main benchmark against which stock market investors measure themselves.  The age old question being: Did I beat the market?  The market being represented by the S&P 500, which is 500 companies closely correlated together to show their collective movements on a minute by minute, day by day basis.

What most people don’t realise is inflation is not the main driver to appreciation of the Indexes.  One of the main reasons the “benchmark” keeps rising over the long term is due to the indexes choosing who can stay in their little club.

The S&P 500, as well as all other indexes, are run by actual companies with shareholders.  And those shareholders want a bang for their buck.  They want to see that index rising.

How do they achieve this?   Simple…turnover.  Out with the old and in with the new.  Names are added and deleted regularly.  In fact, did you know that since 1980, over 320 companies were deleted from the S&P 500 for business distress reasons, which implies a lot of turnover.  This is not including the mergers and acquisitions that have happened over those same decades.

So for those that like to think they are investing in a slow and sleepy index, not so much the S&P 500 is a mover and a shaker when it comes to including the best of the best.

Market News:

U.S. stocks jumped on Wednesday, with the S&P 500 rebounding from a five-session dive, as U.S. crude stopped a four-day skid, concerns eased about a Greek exit from the European Union and investors offered a favorable reaction to minutes from the Federal Reserve.

The key drivers to equity gains appear to be a stabilization of energy, easing concern about a Greek exit and a positive tone to the Fed minutes.

Benchmark indexes retained gains of roughly 1 percent after the Fed release, with the December gathering of the Federal Open Market Committee indicating inflation would not have to climb from current levels for the central bank to begin raising interest rates.

Also helping bolster market sentiments, Germany left open the door to discussing options with Greece’s next government on its debt, easing worries about a Greek departure from the euro zone.

Private employers added 241,000 jobs to their payrolls in December, surpassing projections of a 226,000 gain, according to the ADP National Employment report.

The figures come two days before the U.S. Labor Department’s nonfarm payrolls report, with economists surveyed by Reuters looking for employment growth of 240,000 last month and a jobless rate of 5.7 percent.

European stocks climbed and the euro dropped as the risk of deflation furthered the argument for monetary support.

Thursday:

8:30 a.m.: Weekly jobless claims

3 p.m.: Consumer credit for November

News Sources:  CNN Money & CNBC