The S&P 500 hit record highs in August 2020 despite the economic downturn.
Pop quiz: what caused the Great Depression in 1929?
Answering with “the stock market crash” can be tempting, but the correct answer is more complex than that. Economic historians usually cite rising bank loans and speculation, higher interest rates, agricultural complications, and public panic as factors, but most people just remember Black Tuesday as an all-encompassing, shorthand explanation.
Many consider stock market performance as a representation of economic performance. And while stock market activity can be a bellwether of an economic movement or a symptom of a greater trend, there isn’t a direct relationship between the two.
STANDARD & POOR
In 1941, Standard Statistics Company (which initially rated mortgage bonds) and Poor’s Publishing (which originally guided investors in the railroad industry) merged to form Standard & Poor’s. 16 years later, they created the S&P 500 Stock Composite Index.
The S&P 500 is a stock market index that measures the stock performance of 500 large-cap U.S. equities, covering approximately 80 percent of available market capitalization. Since it represents the largest stocks in the U.S., analysts often use this index as an indicator of overall market performance.
With the stocks weighted by market capitalization, the top 10 stocks in the index make up approximately a quarter of the index's market value. Therefore, the performance of the top 10 stocks listed in the index can dramatically affect market movement; those stocks (as of this article’s publication) are Apple Inc. (AAPL), Microsoft Corp., (MSFT), Amazon.com Inc. (AMZN), Facebook Inc. Class A (FB), Alphabet Inc. Class A (GOOGL), Alphabet Inc. Class A (GOOG), Berkshire Hathaway Inc. Class B (BRK.B), Johnson & Johnson (JNJ), Procter & Gamble Company (PG), and Visa Inc. Class A (V).
This recovery through the third quarter is not the first time the stock market recovered faster than other economic elements during a recession. While investors may rejoice, economic health relies on more than the performance of one index.
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