Description

A stock index simply represents a basket of underlying stocks. Indexes can be either price-weighted or capitalization-weighted. In a price-weighted index, such as the Dow Jones Industrial Average, the individual stock prices are simply added up and then divided by a divisor, meaning that stocks with higher prices have a higher weighting in the index value. In a capitalization-weighted index, such as the Standard and Poor's 500 index, the weighting of each stock corresponds to the size of the company as determined by its capitalization (i.e., the total dollar value of its stock). Stock indexes cover a variety of different sectors. For example, the Dow Jones Industrial Average contains 30 blue-chip stocks that represent the industrial sector. The S&P 500 index includes 500 of the largest blue-chip U.S. companies. The NYSE index includes all the stocks that are traded at the New York Stock Exchange. The Nasdaq 100 includes the largest 100 companies that are traded on the Nasdaq Exchange. The most popular U.S. stock index futures contract is the E-mini S&P 500 futures contract, which is traded at the CME Group.

Prices - The S&P 500 index (Barchart.com symbol $SPX) in 2021 trended higher the entire year on optimism the global economy would bounce back from the pandemic. The S&P 500 posted a record high in December 2021 and finished the year up by +27%.

The U.S. economy continued to recover from the pandemic in 2021 as vaccination rates increased and pandemic restrictions were removed. Q1 GDP rose at a 6.3% (qtr/qtr annualized) pace and expanded at a 6.7% q/q pace in Q2.

Stocks continued to rally through the summer of 2021, even after Fed Chair Powell at the June FOMC meeting said the Fed was beginning to discuss scaling back its bond-buying. Stocks rallied further after the July FOMC meeting when the Fed maintained its bond purchases at $120 billion a month, and Fed Chair Powel said quantitative easing (QE) would continue until "substantial further progress" was made on employment and inflation.

The S&P 500 index fell back slightly into early October 2021 as rising price pressures and improvement in the labor market prompted a hawkish turn at the Fed. At the September FOMC meeting, Fed Chair Powell said that tapering of QE "could come as soon as the next meeting."

Rising price pressures and improvement in the U.S. labor market prompted a hawkish pivot at the Fed. U.S. consumer prices continued to climb above +5.0% yr/yr starting in May 2021 and surged to a 39-year high of 7.0% in December 2021. Gains in U.S. nonfarm payrolls averaged more than 550,000 a month in the first ten months of 2021 as the economy continued to reopen from the pandemic.

Despite the hawkish pivot at the Fed, the S&P 500 continued to rally into year-end and posted an all-time high of 4808.93 in December 2021. From the 4-year low posted in March 2020, the S&P 500 index rallied by a total of +119% through the end of 2021.

Earnings growth for the S&P 500 companies soared by +53% yr/yr in Q1-2021 as the economy emerged from the pandemic lockdowns. The economy strengthened, and earnings growth surged by +96% yr/yr in Q2-2021. However, earnings growth weakened the rest of the year as the delta and omicron Covid variants kept some lockdowns in place that weighed on economic growth. As a result, Q3-2021 earnings growth slowed to 43%, and Q4-2021 earnings slowed to +32% yr/yr. On a calendar year basis, the consensus is for S&P 500 earnings to grow by +7.9% in 2022, falling sharply from the +52% jump seen in 2021.

U.S. stocks finished 2021 near record highs on confidence the Fed can rein in inflation. At the December FOMC meeting, Fed Chair Powell said the Fed would speed up the tapering of its asset purchases and laid out a roadmap for a series of interest-rate increases starting with the March 2022 FOMC meeting.

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