OK, it's NOW TIME to release:
THE DIRTY LITTLE SECRET OF THE STOCK MARKET
Let's say I'm a crook and you're stupid. You invest in my mutal fund and I promise to invest it such that you make money. Every 3 months I have to report to the SEC what I have done with your money. For you to keep investing in my fund I have to show you that you made money.
Unfortunately for me I invested in XYZ and XYZ hasn't done diddly-squat.
No Problem
You and all my other investors own, through me, 1,000,000 shares of XYZ. I bought at $10. So the investment is worth $10,000,000.
I buy ONE stock at $11 at 4:45 on Friday and I close my books for the quarter at 5:00 on Friday.
I "mark to market" all the stocks in the portfolio and - son of a GUN - XYZ stock last sold for $11, there are 1,000,000 shares in the portfolio and - VOILA! - the value of XYZ is now $11,000,000. And I just made, for you, $1,000,000. Don't you feel rich?
(Not only that. Since XYZ has 10,000,000 shares outstanding the company now has a market value of $110,000,000 instead of $100,000,000. The capital of XYZ has just increased by $10,000,000. That's another little secret I will go into later.)
Think that's fraud? Well, it is. If I keep doing this in the crude method outlined in 5 or 10 years the SEC will get around to fining me and removing my mutal plunder ticket.
But its the way the stock market works. The purchase price of a stock is automatically applied across the board. If the stock gets too out of whack with reality (and reality is a flexible concept on Wall Street) short sellers will sell the stock short and eventually, in theory, drive the stock back to $10.
BUT ...
The S&P 500 stocks are a known good investment. So people buy 'em. Since money is coming into the S&P 500 and bidding for the stocks ... the price goes up. Because the the prices of the stocks comprising the S&P 500 are going up they are a good investment. Since they are a good investment people buy 'em. And on. And on. And on.
Until really real reality breaks in and you get 1929, 1970 - 1981, 1987, 2001, and all the other market "breaks" (read: Massive F*ck Ups.)
And then more money starts coming back into the Stock Market because ... well - Stocks are a Good Investment, ya know.
(Pssst! Buddy! Wanna buy some XYZ?)