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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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