Why the 'S&P Pop' Fizzled

Bloomberg

17 hours ago

Transcript

00:00After looking at more than a decade of investing data, I've got some great news.

00:03Being included in the S&P 500 can still make a company's stock go up and make you money.

00:08It's called the Index Inclusion Effect, or I sometimes just call it the S&P Pop.

00:14It happened to America Online in the 90s.

00:16It happened to Google in 2006 and Facebook in 2013.

00:20But for years in the late 2010s, almost nothing.

00:23Instead of a pop, crickets.

00:26Everyone thought the pop was gone, actually.

00:28But I can confidently say, it's back, baby.

00:31Just look at this chart.

00:33And the resurrection is, at least in part, thanks to Tesla.

00:36Let me explain.

00:37For most of recent history, when a stock entered the S&P 500, its price went up.

00:42We're popped.

00:43But something changed around 2015, 2016.

00:46The S&P Pop fizzled out, and no one knew exactly why.

00:50I looked at data going all the way back to 2015, and I've got a theory about what happened and why it's back now.

00:56The logic is simple.

00:57There were fewer IPOs.

00:59S&P additions fall into two categories.

01:01I call them graduates and leapfroggers.

01:04The graduates are typically established companies that move up from the S&P mid-cap 400 to the 500.

01:10But the leapfroggers go straight into the big leagues, usually after an IPO.

01:14Over the last 10 years, those are the stocks that went up the most after entering the S&P, as the black dots on this chart show.

01:23But back in the 2010s, after the financial crisis, fewer companies were IPL-ing.

01:28And that made it seem like the S&P effect was weakening.

01:31There were, of course, exceptions, like Facebook and Twitter.

01:35But that's what they were, exceptions.

01:37And then Tesla changed the game.

01:40The day after the announcement it would be included in the S&P 500, the stock had an excess return over the S&P itself of 8.7%.

01:48And the rally continued for weeks.

01:50By the time Tesla actually joined the index, a month later, its stock had climbed to an excess return of 67.9%.

01:57Just looking at other big winners since then, you can see how extraordinary those numbers are.

02:02Since then, Coinbase, Robinhood, and Palantir have seen some incredible index edition rallies, too.

02:07They just weren't quite as extraordinary as Tesla's.

02:10In theory, these index editions shouldn't have such a powerful impact on prices.

02:14But Tesla appears to have made believers out of a whole new generation of asset managers and retail traders.

02:20So what should you do with this information?

02:22I want to be clear, this is not investment advice.

02:24But it's wise to stay humble as this trend keeps playing out.

02:27The S&P POP's return is just one way markets are changing.

02:31And we're all along for the ride.

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