Tesla’s Big Drop Is Volatility the S&P 500 Better Get Used To

It didn’t take long for Tesla Inc.’s price swings to heavily influence the S&P 500 after its addition to the benchmark.

The electric-vehicle maker slumped more than 5% as of 12:12 p.m. in New York Monday, accounting for almost a 10th of the benchmark gauge’s decline at a time. Both the S&P 500 and the tech-heavy Nasdaq 100 -- which has included the company since 2013 -- each dropped about 1%.

Investors have questioned how the addition of Tesla to the most-followed stock benchmark would affect the index as a whole -- mapping out valuation scenarios as well as volatility implications. Tesla joined the S&P 500 Monday as the sixth-largest weighting, making up 1.6% of the index.

Looking at measures of volatility over the last 120 days, the carmaker is the third-most volatile stock in the S&P 500, only behind Carnival Corp. and Norwegian Cruise Line Holdings Ltd., data compiled by Bloomberg show. However, Carnival accounts for just 0.05% of the benchmark, whereas Norwegian holds a 0.03% weighting. That’s roughly 50 times less than Tesla’s index clout.

Tesla’s Big Drop Is Volatility the S&P 500 Better Get Used To

Inclusion of the vehicle maker could have “a meaningful impact on index performance,” according to Goldman Sachs Group Inc. strategists including David Kostin. In a note last week, the firm estimated the S&P 500’s total return would be 200 basis points higher this year if Tesla was always a constituent.

“Our derivatives research colleagues estimate that Tesla’s addition to the S&P 500 will have a small mechanical impact on index volatility and the VIX,” the strategists added.

To be sure, volatility works both ways, and Tesla is just a single stock in a benchmark with around 500 members. As of Monday morning, a 2.2% decline in Apple Inc. shares shaved more off of the benchmark’s performance than Tesla’s 5% drop.

“Most action on Friday was about Tesla and its addition to the index,” said Michael Antonelli, managing director and market strategist at Baird. “The volume was massive, but I don’t think that affects any price action today. As volatile as Tesla is, it’s just one out of 500 stocks.”

©2020 Bloomberg L.P.

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