Due to the important role that stock trading plays in the economy and the dominance of the U.S. stock market on the global stage, U.S. indices are widely followed indicators worldwide. Also, the longevity of these indices and their role as early benchmarks for the stock market have contributed to their global recognition and popularity.
The importance of U.S. stock market indices
Stock market indices in the U.S. are typically dominated by large, multinational companies with operations and customers across the world. So, indices like the S&P 500, Dow Jones Industrial Average, and the Wilshire 5000 have a significant global reach and impact, and their performance affects investor sentiment and trading activities worldwide. Probably the most well-known, the S&P 500 tracks the performance of 500 of the largest publicly traded companies in the United States and includes tech giants Apple, Microsoft, Alphabet, and Amazon. The Dow Jones Industrial Average, created in 1896, is the second oldest stock index in the U.S. after the Dow Jones Transportation Average and incorporates 30 large-cap American companies from all major industries except the transportation and utilities sectors. Unlike the S&P 500 and the Dow Jones Industrial Average, which include a limited number of large-cap stocks, the Wilshire 5000 was designed to be a more comprehensive measure and aims at tracking the performance of all publicly traded companies with headquarters in the U.S..Indices during global crises
Understanding how stock market indices work and how they are impacted by major events worldwide is crucial for investors and financial professionals to make informed decisions about their investment portfolios. During global crises, stock markets can experience significant volatility and fluctuations. The impact on indices can vary depending on the nature and severity of the crisis. In times of uncertainty, investors may become more risk-averse, leading to sell-offs and declines in stock prices, which can result in negative performance for indices. For instance, at the beginning of the COVID-19 pandemic in 2020, stock market indices plummeted. Similarly, when the results of the Brexit referendum were announced in June 2016, all major stock indices worldwide fell. More recently, markets experienced significant instability and uncertainty since the Russian invasion of Ukraine: Macroeconomic concerns and geopolitical uncertainty led to U.S. indices fluctuate significantly throughout 2022 and the first half of 2023.On the other hand, the end of 2023 and the beginning of 2024 were characterized by positive performances. This surge was driven by increasing optimism regarding the U.S. economy's ability to steer clear of a recession, along with growing anticipation of the Federal Reserve's imminent decision to lower short-term interest rates.
