Why Investors Love the S&P 500

Why do they call it the Standard & Poor’s 500 when it’s making so many folks rich?

Or perhaps it’s time to rejigger the initials “S&P” to stand for Success and Profit. This stock market index, derived from 500 large companies — including 3M Co. (ticker: MMM), PepsiCo ( PEP) and Wells Fargo & Co. ( WFC) — has exceeded the rosiest of expectations. In fact, if you plot a graph from the recent (and not that deep) trough the S&P hit on Feb. 12, 2016, it’s since skyrocketed 56 percent.

“If the economy continues along the same path it’s currently on, I would expect the S&P 500 to continue to reach new records,” says Bob Johnson, professor of Finance at Creighton University’s Heider College of Business. “The S&P 500 has advanced in more than 70 percent of the years since 1926.” Which isn’t too shabby when you consider that little thing wedged between called the Wall Street Crash of 1929.

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First, a little Index 101: Formally created in 1957, the S&P 500 often shares headlines — and solid alignment — with the Dow Jones industrial average, which dates to 1896. While the Dow only contains 30 stocks, including Exxon Mobil Corp. ( XOM), Boeing Co. ( BA) and Pfizer ( PFE), it also hit a trough on Feb. 12, 2016, and has since risen 65 percent. Assuming you’ve been a Dow investor for 20 solid years, you’re 213 percent better off; with the S&P 500, it’s been a concurrent jump of 195 percent.

The enthusiasm for the S&P spans oceans, where one investment expert marvels at its resilience and robust performance. That stems in large part from the S&P’s inclusion of high-tech high flyers known as FAANG stocks: Facebook ( FB), Amazon.com ( AMZN), Apple ( AAPL), Netflix ( NFLX) and Google/Alphabet ( GOOG, GOOGL).

“This changing of the guard from older, more traditional stocks making up the top 20 to 30 on the S&P is exciting and presenting opportunity not really seen to this degree in other world markets,” says Dale Gillham, an Australian commentator and investment analyst with the Wealth Within Institute. “Consequently, investors increasingly see the U.S. market as a safe haven with the potential for good growth.”

The S&P has also jumped a demographic pond, appealing to millennial investors who lived thought the Great Recession of 2007 and watched their parents’ retirement accounts dissolve. With the S&P in the years since, it’s been an opposite story.

“Compared to the Dow, I like the S&P 500 as a better investment tool,” says Chance Butler, founder and CEO at InvestingUnder35. “Just looking at basics for index investing, you get 500 companies versus 30 for the Dow. The sector representation is great and it achieves more diversity.”

And yet having survived the horrors of a decade ago, Butler — who has been investing since he was 6 — remains vigilant.

“Most [index] investors today have not invested through a recession,” he says. “Furthermore, the S&P 500 has mostly been popular during a bull market. During a recession there is lots of fear, which in turn leads to lots of selling; however, this time around that means there will be lots of S&P 500 selling. The index will face steep selling pressure, the likes of which the regular index investor has never seen.”

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Indeed the S&P can’t rise indefinitely, and some observers see 2019 as a crossroads for investors in the index.

“Recent economic data supports the probable continuation of economic growth and expansion with minimal recessionary risk for 2019,” says Craig Bolanos Jr., founder and CEO of Wealth Management Group in Inverness, Illinois. Those forces, he says, “are poised to propel the S&P 500 index toward higher levels next year.”

That said, Bolanos cautions: “There are also potential headwinds that can derail the prospect of another banner year for the S&P 500 index. These include decreased earnings per share growth, increased borrowing costs and a threat of yield curve inversion.”

That adds up to an uncertain picture for investors putting their money in exchange-traded funds based on the S&P 500.

“Given our macro view of favorable economic conditions in the U.S., domestic stocks should perform well next year and should be included in a well-diversified portfolio,” says KC Mathews, chief investment officer at UMB Bank in Kansas City, Missouri.

“But a portfolio solely based on the S&P 500 may be imprudent,” Mathews says. “Valuations in the U.S. are beginning to get expensive and valuations overseas are beginning to become attractive — so a diversified portfolio will provide the most attractive risk [and] return.”

Yet few if any pundits would recommend bailing from the S&P in the coming year — unless you mind bailing out from under all the money as it continues to pour in.

“2019 is likely to lead to another record year for the S&P 500,” says David Kass, clinical professor of finance at University of Maryland’s Robert H. Smith School of Business. “Corporate profits continue to grow and interest rates remain at historically low levels — even after three or four quarterly increases of a quarter percent by the Federal Reserve.”

And just in case if you’re looking for a reason to stay on guard, look away from Wall Street and in the direction of the Great Wall.

[See: 8 Dividend Stocks That Can Also Beat the Market.]

“The biggest risk is probably the one that no one or at least very few people see coming,” says Jeff Mills, co-chief investment strategist at the PNC Financial Services Group. “Trade is the most obvious impediment at the moment. My fear is less based on the size of the tariffs themselves, but more related to escalation with China and what that might do to corporate confidence.”

In other words, it’s never a bad time for Sense & Prudence.

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Why Investors Love the S&P 500 originally appeared on usnews.com