As goes Tesla, so goes the US stock market
(Or, if you prefer, as goes the US stock market, so goes Tesla.)
For much of the past year, Tesla has been the S&P 500 on steroids.
In fact, the correlation of daily returns between the electric vehicle maker and the benchmark US stock index over the past three months is at its strongest level on record.
“Tesla is a high-beta stock and it’s also a stock that’s highly retail driven,” Gordon Johnson, CEO and founder of GLJ Research, said. “So when you get a rally in the stock market, you get a significant rally in the higher-beta stocks because those are the stocks that everyone piles into.”
Generally, one would expect a stock in the S&P 500 to be strongly positively correlated to this benchmark, and this holds true for most of those companies — but as the above chart shows, the electric vehicle maker is often an exception.
Tesla has the distinction of being a high-beta, volatile, large-cap stock whose daily changes are often quite weakly linked to those of the benchmark index. Apple and Microsoft, for instance, have had a correlation of 0.7 and 0.76, respectively, to the S&P 500 since Tesla IPO’d. The EV maker, meanwhile, has a correlation of 0.43 over the lifetime of its listing.
The best explanation for this is that the stock’s connection to its near-term fundamentals has often been tenuous. What can carry the day (and week, and year) are the ebbs and flows of the conviction that CEO Elon Musk’s loyal following has in the ability of the world’s richest man to make his vision of the future a reality.
And, per Johnson’s observation, Tesla’s tight connection recently to the S&P 500 is emblematic of the increased importance of retail traders who are gung ho about popular momentum stocks in dictating the course of the overall price action.
“For right now, being long Tesla is not really being long the stock,” Johnson added. “It’s a levered long on the market, because as the market goes up, you have a lot of people, a lot of participants in the market using Tesla as a means to express the market going up.”
