Next Monday, the 21st of December, Tesla shares make their debut on the S&P 500 index. The much-awaited event is unprecedented and created much of a hustle for the index’s administrator. To make room for Tesla, the S&P 500 went the extra mile, because Tesla will bring with it volatility.
In other words, starting with next Monday, we should all forget about the traditional volatility of the index. Once Tesla is in the basket, volatility will change forever. So, how will Tesla shares trade on their debut in the index? We know for sure that there are firms that have legal mandates to buy Tesla once officially added into the index. However, history suggests that the simple inclusion in the index does not guarantee price appreciation.
Nevertheless, Tesla is up +656.88% YTD, with much of the advance after the announcement that it will be part of the S&P 500 index. Is the move already priced in?
The Biggest Stock Market Rebalancing Event
The debut next Monday is historic. No one has ever tried to include a company worth over $550 billion in the S&P 500 before. Because of the monumental size, some suggested adding the shares in two or even three episodes. In the end, all of them will be added at the same time, and volatility is expected to go through the roof.
Because we come closer to the December holidays and many investment houses are already on vacation or just involved in basic market monitoring, the risk is that the market’s volatility will be higher than usual. If we add to this the fact that trading algorithms usually buy and sell based on correlations during such times, the chances are that the volatility from the S&P 500 index will spill over to other markets, too – e.g., FX market.
Not everyone is bullish on Tesla, though. JP Morgan, for instance, one of the largest investment houses in the world, doubles down on bearish bets on Tesla. In fact, it is even warning investors not to add Tesla to their portfolios once included in the S&P 500 index for the simple reason that the shares are dramatically overvalued. JP Morgan puts it very simply – Tesla’s multiple of earnings in nominal terms is so high that it exceeds any company, in any industry, at any time in history.
Monday’s S&P 500 debut will certainly make history – it already did, as this is the largest rebalancing event ever.