Stock Index Futures, U.S.

A stock index simply represents a basket of underlying stocks. Indices can be either price-weighted or capitalization-weighted. In a price-weighted index, such as the Dow Jones Industrials 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 indices cover a variety of different sectors. For example, the Dow Jones Industrials 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 S&P 500 at the Chicago Mercantile Exchange (CME).

Prices – The S&P 500 index in 2010 extended the recovery rally that began in 2009 and closed the year up 12.8%, adding to the 23.5% rally seen in 2009. The S&P 500 continued to rally in early 2011 to a 2-1/2 year high of 1344.07 in February, which represented an overall 102% rally from the 14-year low of 666.79 posted in March 2009.

The U.S. stock market was able to double in value from the March 2009 through early 2011 because of the recovery in the U.S. and global economy and the remarkable recovery in earnings growth. That recovery was driven by an extraordinarily easy monetary policy from the Federal Reserve, which kept its federal funds rate target near zero during 2010 and also engaged in a massive new $600 billion quantitative easing program in November 2010. The U.S. recession, which officially ended in June 2009, showed six straight quarters of growth through 2010. U.S. GDP took a dip to +1.7% in Q2-2010 due to the fall-out from the European debt crisis, but then picked up to +2.6% in Q3-2010 and to +3.2% in Q4-2010.

Strong growth in the developing world also helped to boost U.S. economic growth and corporate earnings. China’s economy accelerated in late 2009 and early 2010 with GDP growth of +11.9% in Q1-2010, easing just mildly to +9.8% by Q4-2010. U.S. exports bottomed out in April 2009 and then rose steadily by a total of 31% by December 2010.

U.S. corporations did a remarkably good job of preserving earnings during the recession and then quickly expanding earnings once the recession was over. U.S. corporations preserved margins by slashing employee headcounts and improving productivity. Many corporations also focused on sales in the developing world, where growth was much stronger. By keeping costs down, corporations were able to boost earnings far beyond revenue growth. Bank earnings were devastated by the financial crisis, but managed to bounce back in 2010.

Earnings growth for the S&P 500 companies was negative for nine consecutive quarters from Q3-2007 through Q3-2009. However, earnings growth turned positive in Q4-2009 and was then positive for the next five quarters through Q4-2010, showing growth for all of 2010 of 30.7% y/y. As of early 2011, the S&P 500 was trading at a very reasonable price-to-earnings ratio based on forward-looking earnings of 13.5, which was below the 5-year average of 14.9 as well as the 10-year average of 16.7. The reasonable valuation level leaves room on the upside for further gains in stock prices once earnings growth and the economic recovery gain better traction.

Excerpted from the CRB Commodity Yearbook. For more information on CRB products click here