The S&P 500 and the FTSE 100 Groups of Companies - Essay Example

S&P 500 AND THE FTSE 100 COMPANIES Discussion The S&P 500 and the FTSE 100 groups of companies have some common traits in that the listing follows particular determined indices indicating the general value in stock prices. The determination is therefore periodic and regular as the values indicate the level of growth as well as the values of such company stocks in the stock markets or as determined by ratings in market capitalisation. Maintenance of high stock values within the market requires that such companies as are listed within the listings undertake strategic decisions, which would ensure that the companies remain at the helm of the listing (Levin and Wright, 2006, pp. 54–60). For instance, companies in the two listings would adopt some mechanisms of ensuring higher value to shareholders. Among other tools adopted were setting predefined demanding return targets for the capital employed. Nevertheless, the early 1980s saw a great failure to the companies when the target shareholder values were not realised. In this understanding, this paper intends to present an analytic report on the factors that would have caused the great failure by both the S&P 500 and the FTSE 100 companies at the time. Market capitalisation shares normally determine the placement of the individual companies within the S&P 500 group or the FTSE 100 group where when a company fails to meet a set threshold, it is dropped and replaced with another company which at the moment surpasses the threshold set (Vaaler and McNamara, 2004, pp. 687–690). For FTSE 100, the reviews on the companies and subsequent determination of the companies within (or out of) the index occurs quarterly a year with intervals in March, June, September as well as in December. The FTSE 100 is shown to be the most used stock market indicator within the UK and used in London stock exchange whereas the S&P 500 indices are used within the US stock exchange. The US indices are mostly used as equity indices (French and Ahmad, 2011, pp. 196–200). The essence of stock market performance is shown hrough the industrial production index, exchange rates, interest rates in the short term as well as through consumer price index rates and employment rates. The world’s memorable stock market crash, which, meant that huge values were lost over very short times was encountered in October of 1987(Gammill, James and Marsh, 1988, p. 25). The S&P 500 index in stock market fell significantly with over a 20% margin. The crash is not only significant for the study in that the world stock trading came to an abrupt halt but because it explains the stringent nature of the stock markets globally and how, under extreme pressure, the systems would crumble. Favorable tax treatments equally led to boosts of the equities and thus the 1987 came as at the peak of the economic performance (Floros and Vougas, 2008, p. 498). The main factors blamed on causing the crash are overvaluation, market psychology as well as illiquidity and the program trading. The S&P 500 and the FTSE 100 indices were greatly affected by the crash as shown by the rating before the June records and the ratings after the month. History is that the correlation between the S&P 500 and the FTSE 100 indices in the US and the UK respectively has been varying with no correlation recorded for the periods prior to 1970 but higher correlations being visible after the 1970s. Moreover, the events in the 1980s saw the significance in correlations between the indices being notably high (Baigent and Massaro, 2009, p. 176-182). The 1990s corporate management was characterized of higher shareholder demands as well as higher demands within the financial sector, a feature that saw the rise of an aggressive financial sector especially within the early years of the 21st century (Maux and Saout, 2004, p. 737-745). In the 90s, the stock values failed to rise to the precedence levels as the values created by corporate management failed to reciprocate within the value markets. The corporate management within the 90s failed to have coherence with the demands especially within the stock market. The corporate management within many of the companies in the UK and US failed to take any change; hence, the occurrence of no major change as would have been anticipated after the 1987 credit crunch was witnessed (Wigmore, 1998, p. 36-48). Shareholder value as used within business terms implies the measurement in which the success of a company is evaluated on and implies the returns or revenues that individual shareholders of a company benefit from the trading transactions of the company (Partington et al, 2001, p. 78-86). It therefore represents a shift in the measure of success from productive and market success criterion to a coupling with aggressive stock market capitalism that increases pressure on firms to deliver financial result, becoming the main measure of success. This explains the essence of incorporating the shareholder value in the analysis of the failure of many, if not all of the companies listed in S&P 500 in US, as well as the London stock exchange based SFTE 100 group of companies. The value represented by the shareholder value explains the interest that investors’ expectations are based on when investment decisions are considered. This value therefore becomes an effective tool that the success or failure of an investment venture would be based on. The failure of many of these companies in the London stock exchange and the US stock exchange to maintain successfully a profit merging to warrant gains for the shareholders in their operations within some parts of 1980s and 1990s, especially during the economic crunch, forms the main reason of their fall. However, this analysis points out to the main cause of this as being unwarranted gains by the management and CEOs of these companies, which explained the high target for the shareholder values, which would not be realized especially during the hard economic times as were characteristic of global economy in the time. One major feature that was observable in the prevailing performances by the S&P 500 and the FTSE 100 companies was that corporate management and especially the high-ranking positions gained a lot compared to the shareholders (Dunis, Laws, and Rudy, 2011, p. 185-193). This explains the efforts that are always in place in pursuit of higher margins of profits in order to realize the higher returns by the management, while at the sometime targeting the shareholder targets set. In fact, modest gains as well as permanent income increase by the management were characteristic features of these companies, and they overran the values realized in profits and sales especially within the UK. The stock valuation is usually dependent on current equities as well as future expectations of cash flows, the risks that the flows face, as well as the discounting rate at which the cash flows are subjected to (Chan and Howard, 2002, p. 45-52). The occurrence of the crash in 1987 coincided with the point where stock prices rated highest and dividends low. There was therefore a difference in the bond’s real yield and the price rations on earnings and dividends. Just prior the occurrence of the crash, the prices of stock shifted from the estimated consistent future profits to very high levels but leveled down to a near consensus valuation at the crash. Although the risk premia would have been pointed out as an explanatory factor to the crash, none of such supportive evidence would be shown in relation to the failure of the companies. Optimism with investors would better explain the extraordinary continued rise in performance of the S&P 500 companies as was observed between 1982 to 1987. The forecasts releases within the period always pointed towards increased corporate profits over the period. Besides, the investors ran into a heightened risk while they invested more in stock markets and the insurance sector as explained by the false positive projections. Among other explanatory causes of higher interest rates in the stock markets would have been the high levels of inflationary expectations by the companies. Besides, prevailing budgetary deficits within the two countries would have caused the surge in interest rates within the stock market (McKeon and Netter, 2009, p. 123-126). This analysis therefore shows that no one factor would be sufficient in explaining the economic crises that the globe faced in the late years of 1980s and whose effects were detrimental to the companies listed within S&P 500 and the FTSE 100 lists (Bennell and Sutcliffe, 2004, p. 243; Booth and Cleary, 2009, p. 155). However, a cumulative effect of a sharp rise in interest rates may have been the most influential cause of the crash; hence, the failure suffered by the companies. High return targets on capital set for the shareholders were not realized therefore explaining the great losses suffered (Huang & Wang, 2008, p. 722-730). The great success of the FTSE 100 companies since the formation in 1984 came to the heights with the privatization of such companies as the British airways and the Rolls Royce, and this had significant effects towards the effects suffered in the 1987 credit crunch (Laatsch, 1991, p. 313). Nevertheless, the companies’ performance rose to relatively good performances at the close of the century as shown by the records in 1999. The effects of globalization has slowly but certainly taken over the globe especially with technological advancement. World trade has equally advanced where individual countries are easily gaining access to the global market virtually. Besides this having positive effects to the global economic, it poses unprecedented effects on the stability of the individual countries’ economies as well as the global economies. The effects of the global crash, which spread across all globe and affected virtually all players within the credit market, can illustrate this (Monoyios and Sarno, 2002, p. 285-290). The globe has therefore turned into a ‘small’ surface, where individual person’s transactions can be directly felt by multitudes of persons across the globe. A distinction is made between earnings per share, short-term profits as well as stock prices as would be confused for shareholder values. For instance, the analysis of the tragic Enron disaster in which all shareholders lost virtually everything cannot be explained in terms of shareholder value. Besides, an economic analysis of a company performance should be understood from the perspective of all stakeholders as against evaluation of stakeholders’ value’, which would be partial. It is an ethical responsibility however for corporate management within capitalist economies to maximize on the interest of the shareholders and hence the ‘gluttony’ of the management teams, who put own interest before the interest of the shareholders is misplaced (Yu and Ting, 2012, p. 131-135; Mcnulty, et al. 2011, p. 92-100). Conclusion For companies to be listed within the London stock exchange as well as in the US stock exchange, there are basic standards that must be fulfilled among which is to surpass a predefined index in market capitalization (Bamber and McMeeking, 2010, p. 133-138). The reviews of companies which qualify for the inclusion (or otherwise) are done periodically within a year and this determines those that appear in the listing as well as those that drop to be replaced by others. This paper has specialized on critical analysis of the performances of companies within the listings especially as have been since the 1980s to the modern day performance. However, the analysis was holistic and the companies keep changing as well as economic performances vary. Special focus has been on the performance failure of most if not all the companies within the listings in the later years of 1980s when the global economy faced an economic crunch. The economic crash of 1987 remains a strategic feature within the history of the performances of the companies in the listings (Bates and Craine, 1999, p. 248-254). Among other factors that have been pointed out as to have played significant role in the credit crash in the time was the over-optimism by company management caused by over rating by economic forecasters. In fact, pursuant of shareholders value explains the main reason why companies set very high and unrealistic return targets for their shareholders (Aggarwal, Inclan and Leal, 1999, p. 33-35; Kakabadse, Kakabadse and Kouzmin, 2004, p. 561-562; Mcnulty, et al. 2011, p. 91-100). This contributed greatly towards the global failure that resulted to majority of the companies in the listings. Subsequently, the 1990s saw great demand of higher values of shareholder’s value and hence higher economic demands. Nevertheless, it is pointed that the years that followed were more favorable economically for the companies to the previous years, especially during the credit crash (Ang and Boyer, 2009, p. 138-142). 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