The S&P 500 Index turns 50

From Jeremy J. Siegel and Jeremy Schwartz in the Wall Street Journal (Subscription required, or use Congoo):

From its inception on March 1, 1957, through the end of last year, the average annual return of the S&P 500 Index, which today comprises almost 80% of the value of all U.S. stocks, has been 10.83%, a return that most active equity managers have found very difficult to match. The changing composition of the index also mirrors larger changes in the economic landscape. Because of mergers, bankruptcies and other corporate changes, almost 1,000 new companies have been added to the index, as others were dropped, since its inception.

In 1957 the technology, health-care, and financial sectors, which today comprise almost one-half the index's value, made up a mere 6% of the index. The financial sector was particularly small in the 1950s and 1960s since commercial and investment banks, as well as brokerage houses, were not included in the S&P 500 until the 1970s.

I think there are two interesting points here. The first is that if you accept that the S&P 500 represent the largest and strongest basket of companies in the US (if not the world), the level of change in that basket is amazing. Its growth represents the present value of the innovation they have developed.

The second, is for those cynics out there who claim free markets just make the rich richer, and big companies just get bigger. Think of that, in the last 50 years, the S&P 500 has turned over twice - and where some industries have slowed down and petered out while others have grown - with many of the largest firms either in their infancy or even non-existent 50 years ago. The reason markets have been so successful where central planners have failed, is that the future is unknown.

The market is a collection of millions of different experiments optimizing to profitability - i.e. society's wants, needs and desires. These simultaneous experiments are able to respond far more efficiently than government's heavy (and slow) hand. The more efficient the market, the better the allocation of capital allowing the most successful experiments to grow (and be copied). As a corollary, markets will always be better able at responding to society's challenges so long as the future is unknown.