Will Tesla Destabilize The S&P 500?

Tesla Inc TSLA was added to the S&P 500 on Monday and shares are down 7.8% this week, contributing to an overall decline of 0.5% for the SPDR S&P 500 ETF Trust SPY.

Given a number of market analysts and experts have compared Tesla’s parabolic rise in the last two years to 1999 dot-com bubble stocks, S&P 500 index fund investors are understandably concerned that Tesla may have destabilized the entire S&P 500.

Related Link: Despite $38.2B In Losses, Tesla Short Sellers Ramp Up Bearish Bets

No Cause For Concern: DataTrek Research co-founder Nicholas Colas said S&P 500 index investors concerned about Tesla’s bloated valuation should remember that Tesla has only a 1.6% weighting in the index.

In the past year, Tesla has averaged a one-day up or down move of 4.1%, about four times the S&P 500’s long-term standard deviation of daily returns. In other words, Tesla’s influence on the volatility of the S&P 500 would have averaged about 6 basis points at the mean over the past year, Colas said.

At the same time, Colas took a look back at the impact joining the S&P 500 had on high-growth tech stocks Facebook Inc. FB, Amazon.com, Inc. AMZN and Alphabet Inc GOOG GOOGL. He found that Alphabet and Facebook experienced less volatility and a higher correlation to the S&P 500 after joining the index. Amazon’s volatility, on the other hand, remained elevated and the stock continued to trade independently of the index.

Tesla And Amazon: Colas said Tesla more closely resembles Amazon than Facebook and Alphabet, suggesting investors should be prepared for the stock’s volatility to continue in 2021 and beyond.

But even if its volatility continues, Colas said S&P 500 index investors don’t need to worry too much about Tesla’s destabilizing impact.

“Yes, it is representative of the animal spirits that drive marginal stock prices for a host of disruptive names. But it is still just 1.6 percent of the S&P 500,” he said.

Benzinga’s Take: Even in a worst-case scenario in which Tesla gives up all its gains from the past two years, it would represent about 90% downside for the stock. At a 1.6% overall weighting for Tesla, that 90% downside would still only translate to a 1.44% decline for the S&P 500.