One of the most eagerly awaited events for the financial community happens today – Tesla is included in the S&P500! Why should anyone care? Well, if there is one thing to care about in late 2020 investing world, this is the one.
Before starting, think of this – with most investment houses out for holidays, Tesla’s inclusion in the S&P500 index will move markets. It has the power to move markets on any other day, not to mention on a day when almost no one is watching.
Is this the 2020 Bubble?
The S&P500 is an index. The Standard and Poor’s committee chooses the components of the index-based in strict rules. One of them, having four consecutive positive EPS quarters, was met by Tesla early this year.
Since then, rumors circulated that the company will be included in the S&P500 index. Judging by what we are about to witness today, they were right, and this is one index inclusion to tell your grandkids about.
On November 16th, the S&P500 index committee announced it would include Tesla in the index’s componence starting with December 21st – today. At that date, Tesla’s market capitalization was $380 billion. Fast forward to December 21st, Tesla’s shares are up 73%.
At the current valuation, Tesla trades at 25 times sales and 422 times earnings – who is willing to pay such premiums? Apparently, many.
Passive investing refers to building and keeping portfolios that match the componence of an index. In contrast, active investing means constantly buying and selling companies with the aim of beating the benchmark – passive investing.
Passive investing is huge, and thus investors will be ‘forced’ to allocate 1.75% (Tesla’s weight in the index) to one of the most overvalued companies on record.
Tesla’s shares gained 730.68% in 2020 so far. At 1.75% of the index, if Tesla’s shares drop 88%, it would only bring the share price to the start of 2020. However, it would be different due to the impact on the overall market.
Every investor noticed that since November 3rd, the Election Day in the United States, stocks and the USD moved hand in hand. The higher the Dow Jones and the S&P500 went, the lower the USD. Hence, including Tesla, with its volatility in the most tracked stock market index in the world, is a move that will influence all markets.
Prepare for a wild Monday and an even wilder end of year.