December 21st — We’re All Buying Tesla Stock!
By: David Ferrara
Tags: Investing, Tesla, Stocks, Economics, Stock Market

Currently Tesla sits at a total market cap of just under $600B. The S&P 500 sits at a market cap of approximately $30.5 trillion.

The S&P 500 on December 18th will finally be including Tesla in the index. This mean’s that if you have an S&P 500 index fund that you will be buying Tesla. Whether you like it or not.

Tesla stock will go up even higher as all of the money manager out there are forced to buy Tesla stock. Other S&P 500 stocks will go down as their shares are trimmed to make room for Tesla.

The Math (admittedly with some estimates and guesses in here)

I wrote here about how much of the stock market is currently in passively traded funds. Approximately 41%. I cannot find a breakdown of how much of that is in S&P index funds. But admittedly doing some bad research and noting that the most popular Vanguard and Schwab funds are their S&P index funds and S&P index funds are talked about almost non-stop on the personal finance websites let’s say its a third.

The total stock market cap currently sits at $36.3T as of September 30, 2020. It would be higher than that given the market surge the last couple of months so let’s say it’s an even $37T.

Step 1 — Taking 33.3% (share of S&P index investors) of 41% (share of passively traded funds) of 37T that is $5T.

Step 2 — Taking Tesla’s market cap of $600B as a percentage of the total S&P 500 market cap of $30.5T we get 1.97% so let’s round that up to 2%.

So, now we have the total amount of S&P traded funds of $5.0T (admittedly a giant guess on my part) and the percentage of the S&P 500 that needs to be swapped out (2%) from other stocks to Tesla stocks.

Step 3 — 2% of $5.0T is $100B.

So, what does that $100B represent?

Well, on a single day when money manager’s swap out 2% of their current S&P stocks in their index funds for 2% of Tesla. That means that they would be selling a total of $100B of other stocks and buying $100B of Tesla.

Remember a stock goes up when there is more demand for that stock than supply. And down when there is more supply than demand.

So, in this case we are increasing demand of Tesla stock by $100B and decreasing demand of other stocks by $100B.

“Tesla will be added to the S&P 500 in a single step despite its more than $500 billion market capitalization, S&P Dow Jones Indices said on Monday, forgoing a possible phased approach that was considered to ease the impact of adding such a large company to the U.S. stock benchmark.” ~ quote from cnbc.

I for one will be curious what this does to Tesla stock. As well as the total S&P 500 index, as well as a couple of other stocks I own that are currently in the S&P 500.

Especially the FAANG stocks as those have the largest market caps, meaning they have the largest weighting within the S&P 500, meaning they will make up a larger part of that $100B being sold.

By the way this looks like a great opportunity for Elon to sell some the $5B in stock that he just registered under an “At The Market” program.

Should be interesting. My guess is that there is a small dip to the S&P 500, then buyers rush in to buy the dip on the hot S&P 500 stocks (i.e. the tech stocks), the rest of the S&P 500 stocks might take a little longer to recover but probably still just days, and not weeks or months.

For Tesla, I think so much buying is being done in anticipation that some might take the opportunity to offload some Tesla on December 21st after it should hit an all time high at open on December 21st.

But all of this is just a guess. I am not an expert, an even if I was, the experts I doubt are able to make these types of predictions.