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Today,
electric automaker Tesla will join the U.S. stock market’s equivalent of
Top 40 radio: the S&P 500 index. The induction caps a sensational
year for the company, whose shares have gained more than 700% as it
smashed vehicle delivery records.
Now, we wouldn’t normally write about the reshuffling of the S&P 500 (typically a mundane affair), but...
Tesla is not an ordinary stock
For one,
it’s absolutely humongous. With a market capitalization of $659 billion,
Tesla will be the largest company to ever enter the S&P 500. And
once it’s in, it’ll be the sixth-biggest company in the index—sitting
behind only Apple, Microsoft, Amazon, Google parent Alphabet, and
Facebook.
- It also dwarfs other car stocks. Tesla’s market value is 18x Ford’s and 10x GM’s.
Second, the stock is extremely volatile,
meaning it’s prone to dramatic daily swings based on company news that
might not be a huge deal. Because of Tesla’s size, the value of those
daily undulations can sometimes surpass the entire market capitalization
of automakers such as BMW or Fiat Chrysler.
Third, for
many years Tesla wasn’t profitable. Only in the past several quarters
did it actually make money, which is one of the qualifications for
inclusion in the S&P.
What does it mean for the stock market?
More than $4.5 trillion is managed by index funds that track the S&P 500. So those fund managers have gone on a Tesla stock buying binge for over a month in order to mirror the index’s new composition.
- Because of everything we mentioned above, Tesla’s inclusion should have a noticeable impact on the S&P. Goldman Sachs wrote that the index would be two percentage points higher this year had Tesla been a member.
Looking ahead: Could
Tesla stock become...boring? Potentially. Finance professor Anna
Pavlova told the NYT that over time, stocks included in the S&P tend
to move more as a group and their volatility goes down.
Then again, it's Elon Musk we're talking about.
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