- Individual stock price performance fluctuates according to the profit potential of the underlying business. For example, share prices for Exxon and Chevron should advance sharply alongside news of high oil prices.
Share prices can shift between zero and infinity over time. Share price appreciation is unlimited because no ceiling exists for corporate profits. Alternatively, stock prices and business valuations deteriorate toward zero amid bankruptcy. - The Nasdaq Composite Index, S&P 500, and Dow Jones Industrial Average are the three major U.S. stock market indexes. Your portfolio of American stocks is likely to be making money on days when all three stock market indexes have advanced by at least 1 percent. Major news media outlets, such as Bloomberg, CNBC and CNN, post stock index reports throughout the day.
The Nasdaq Composite Index includes stocks such as Amazon, eBay and Google, and is associated with the technology economy. Meanwhile, the S&P 500 and Dow Jones Industrial Average feature large capitalization stocks, such as ExxonMobil, McDonald's and Coca-Cola. The S&P 500 is a better gauge of overall stock market performance because it is a market-weighted index, where the largest companies carry the most influence over its value. - The S&P 500 Index has posted an 11 percent average annual return since its 1957 inception. This 11 percent statistic does include several peaks and troughs that parallel the economic cycle of growth, recession and recovery.
The S&P 500 performed particularly well during the late 1990s technology build out. Between 1995 and 1999, the S&P 500 posted 38, 23, 33, 29, and 21 percent annual returns before entering into recession. During the 2000-2002 recession, the S&P 500 lost 9, 12 and 22 percent of its value. Later that decade, losses were especially pronounced as the nation grappled with the effects of a housing crisis. In 2008, the S&P 500 fell by 37 percent. - Bear market losses of at least 20 percent may confirm economic recession, which is an opportune time to purchase cheap stocks. In response to recession, you can expect government officials to coordinate interest rate and tax cuts to stimulate the economy. Over time, these initiatives often translate into improved future stock market returns.
- Stock market performance can trigger social unrest. When stocks perform well, income gaps separating the rich from the poor widen. Political leaders may then propose higher taxes on the wealthy to provide for social programs. Ultimately, stocks may crash heading into recession. At that point, the wealthy would demand tax cuts to create jobs, while the poor and middle class blame the wealthy for initiating the economic collapse.
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