Making Of An Index: Standard Statistics

The Weekly Index (1918–1956)

From 1918 to 1956 Standard created a weekly index of approximately 200–400 companies (the numbers varied over time but it was essentially “all the companies”). Once a week, they would gather up all the price data and compute an index.

The Daily Index (1925–1956)

A few years after creating the weekly index, Standard also created a daily index. They created the index in 1928 but went back and calculated historical daily values for the index from December 1925 onwards. Since gathering the data and calculating an index every day was laborious before computers, the daily index was comprised of fewer companies. In fact, it had just 90 companies.

  • 50 industrial companies
  • 20 railroad companies
  • 20 utility companies

The birth of the S&P 500 and the death (and loss) of the weekly index (1957)

In March 1957 Standard made two big changes:

  • The “daily index” was expanded in scope from 90 companies to 500. This was the birth of the S&P 500 that we know today.
  • The “weekly index” (which, at that time, had over 500 companies in it) was discontinued and the data essentially thrown away.

No fixed allocation (1988)

Remember how we said that the “daily index” was hard-coded to have a certain number of railroad companies and a certain number of utilities and so on?

  • 400 industrials
  • 20 transport companies (since it was more than just railroads)
  • 40 utility companies
  • 40 financial companies
  • 388 industrials
  • 16 transport companies
  • 43 utility companies
  • 53 financials

S&P 500 prior to 1926

As we saw above, the Standard & Poor company only calculated index data going back to 1926. But they provide index data before that. Where does that data come from?

Ibbotson’s SBBI

So what does all of that mean?

Siegel & Shiller

Robert Shiller and Jeremy Siegel are two of the most famous financial economists. Both have published books that rely on the historical performance of stocks since 1871. What data do they use?

  • Returns from 1871–1925 are averaged over the month of January. This will “hide” volatility, making it look like less than it actually was.
  • Returns from 1871–1925 are based on the first edition of the Cowles Commission, which has errors corrected in later editions.
  • Returns from 1926–1956 are based on a set of just 90 stocks, rather than a broader representation of the market.
  • Returns from 1956–1988 are based on fixed-allocations within sectors.

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