An index is a statistical means of calculating a change in an economy (economic index) or market (S&P 500 or Dow Jones Industrial Average). The index is usually a weighted average of components from that particular market. For example, a metals index might take samples from metals markets and average them, allowing for a measured average of the current states of the metals market. Or for the FTSE 100 in the UK, this would be an equity index of the 100 names in the index. One can see the average moving higher or lower – the index price – measuring the performance of that index. The S&P 500 index incorporates 500 of the top names in the US which, when taken as an average, indicates the health of the entire – or most of – the equity market. So if an index moves higher by 10 percent each year for a period of five years, this clearly points out that the health of the underlying economy and the individual companies in that are in the index.
Currently in the US, and other markets, since October 2018, the indices or indexes are performing badly. Why is this? Well after 10 years of economic expansion since the Great Recession of 2008, indexes have rallied. However, now that the tax cuts are having less impact and many investors are expecting economic slowdown, corporate profits of many of those listed names in the index are expected to fade. For example if the S&P 500 seens 60 percent of its listed companies reporting weaker profits in 2019, then the stocks in this index will start to break down, taking the index with it. Currently, the market is pricing in weakness and the indexes are falling 1.0 to 2.0 percent over a period of several days. The tech heavy Nasdaq which is impacted by big tech in the US – we have often written articles and produced audiovisual presentations – is seeing a massive sell-off. It is trading much lower over the past 3 months simple because each time Facebook or Apple report weaker profits or bad news in general, that stock is sold off. Collectively these individual stocks being sold off weaken the index as they are components of the index.
The index is a macro way or a big picture way of seeing the health of the stock market. Most people now want to focus on the index and ETFs, coming up in another presentation from Classiarius soon.
Please look at ETFs, Exchange Traded Funds which replicate small parts of the index allowing for investors to buy or gain exposure to groups of names such as autos, tech, and other components of the index.