Indexology^® Blog

In a release on June 19^th the S&P Dow Jones US Index Committee raised the market cap guidelines used when selecting companies for the S&P 500, S&P  Mid Cap 400 and S&P Small Cap 600. The new guidelines are:

• S&P 500: Over $4.6 billion, raised from $4 billion
• S&P Mid Cap 400: $1.2 to $5.1 billion, raised from $1 to $4.4 billion
• S&P SmallCap 600: $350 million to $1.6 Billion, raised from $300 million to $1.4 billion

The changes reflect the market’s movement since the bottom in March 2009 and especially in the last two years of gains.  The last increase was almost two and a half years ago in February, 2011.   Given the recent gains, what makes a company an S&P 500 Company is a somewhat bigger hurdle than it was two years ago.  The Index Committee monitors market developments as well as events affecting the indices. The guidelines help determine which index a company should be added to.  Market cap is not the only factor affecting the selection of companies for the S&P 500 and our other indices.  Other criteria include what sector the company is in, its liquidity and financial viability and that it must be a U.S. company.

The FOMC statement and Ben Bernanke’s press conference was not well received this afternoon.  Hopes for something that would smooth over the recent volatility with assurances that QE3 would last for many more months to come were dashed by comments during the press conference that most FOMC members could see bond buying tapering off this fall and ending by sometime in 2014. Despite those remarks, the Fed expects rates to remain low into 2015.

Behind all this is a factor bigger than even the Fed — the economy.  If the economy continues to strengthen interest rates will rise and if the economy reverses and turns down, rates will drop. Given the Fed’s 2015 forecast of 2.9% to 3.6% GDP growth, inflation of 1.7% to 2% on Core PCE and unemployment of 5.8 to 6.2%, interest rates will be slightly higher in 2015 but not out of sight. Look for the ten year treasury to be 3.5% to 4.5% in 2015.  The rest of the Fed’s economic projections slightly lowered the outlook for the rest of 2013 and made 2014 look a bit better.

In the short run traders can’t fight the Fed, but in the long run the Fed can’t fight the economy.

David Blitzer, Managing Director and Chairman of the Index Committee, answers the question, “What can an index do for me?”

Q1 Buybacks Slightly Up, But Fewer Shares Repurchased
Breakdown shows a broader participation in share count reduction – but it is slow

Q1,’13 S&P 500 buyback expenditures slightly increased 0.8%, to $100.0B from $99.1B in Q4,’12, and was up 18.6% for Q1,’12 $84.3B (record was Q2,’07 at $172B).
12 months ending Mar,’13 increased 3.8% to $414.6B from the $399.5B posted in the prior 12 month period (12 month high was 2007, at $589.1B)

Companies continued to protect their earnings from dilution due to option execution, however, actual shares repurchased were down, as the 0.8% increase in expenditures failed to keep pace with the 6.8% increase in the average share price for the quarter.

Even with programs and authorizations setting record levels and receiving extensive press coverage, the number of companies moving back to share count reduction is slow, but they are increasing, with 81 issues reducing their share count by at least 1% in Q1 (over Q4,’12), a general measure of share count reduction, as compared to just 36 issues for Q4 2012 (over Q3,’12). In Q1, 328 issues reported share repurchases, up from 317 in Q4, with 212 of them reducing their share count, up from 98 in Q4.

While buybacks remain the instrument of choice to prevent earnings dilution from employee options and dividend reinvestment plans, the first quarter appeared to fall short of the needed shares. Overall shares have slightly increased, as issuance has outpaced repurchases. In the first quarter the overall share count was up, with the Information Technology sector, the leader in buybacks, slightly increasing its overall share count by 0.9%. The Telecommunications Sector, led by AT&T, which has reduced its share count by 6.9% over the last four quarters, reduced its overall share count by 3.5%.

The Information Technology Sector held its position as the largest repurchaser, spending $17.5B, which was down from the $22.7B spent in Q4.
The Health Care Sector was right behind IT, as it increased to $16.8B from $11.4B, with Telecommunications increasing from $4.4B in Q4,’12 to $6.5B in Q1.

AT&T led with a $5.9B expenditure (up from $4.4B), followed by Exxon Mobil ($5.6B), Pfizer ($4.6B), IBM ($2.6B), and JP Morgan ($2.6B).

Given all of the talk and authorizations, there is great expectation for the second quarter, especially from Apple, which announced a record authorization.
Share prices for Q2,’13 are running 6.3% higher than Q1,’13 and 19.3% higher than Q2,’12. This means that companies will need to spend more just to buy back the same number of shares, and spend additional funds if they wish to create share count reduction. They talked the talk, now we’ll see if they walk the walk.

(FYI – cash has again set a new record, be it by 0.17% gain)

After two months of deflation, headline CPI (Consumer Price Index) gained 0.1% in May, marking its second positive reading in at least the past seven months. Over the past 12 months, CPI inflation is up 1.4%, accelerating from April’s 1.1% reading. http://www.bls.gov/news.release/cpi.nr0.htm

Historically, commodities as an asset class have had positive correlation to inflation. In the past 10 years, using yoy% (year-over-year) monthly return data from 1/2003-12/2012, the DJ-UBS CI has had correlation of 0.64 to CPI yoy Index and the S&P GSCI has had correlation of 0.74 to CPI yoy Index. This is because commodity indices reflect our changing expectation of future prices by including futures contracts as constituents. Further, since food and energy are major components of the CPI and are among the most volatile of inflation, they are the key drivers of the indices.