Sideline Money Returns, TSLA’s Awkward S&P Path

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Sideline Money Returns, TSLA’s Awkward S&P Path

Two quick topics today:

#1: Let’s consider what Tesla’s eventual inclusion in the S&P 500 will do to the composition of the index. Some background:

  • The Technology sector is presently 28.6% of the S&P. Amazon (Consumer Discretionary) is another 5.0%, and Google/Facebook (Communication Services) are 3.3%/2.4% respectively.
  • That makes Tech + AMZN, GOOG/L and FB 39.3% of the entire index. Throw in Netflix (0.8%) and you’re right at 40%.

Problem #1: at a market cap of $450 billion, TSLA would have approximately a 1.5% weight in the S&P 500, further concentrating the index in just a handful of names. This would make the 500 more volatile over time, especially if/when concerns about a bubble in the stock prove true. TSLA is not like the S&P’s other Tech heavy hitters, after all. It is barely profitable, and its black ink comes from the sale of government mandated credits rather than factory operating margin.

Problem #2: Tesla would almost certainly be in the Industrials sector, but with about a 20% weight in that group. There is a lot of precedent for such a 1-stock sector overweight, of course. Apple is 25% of Tech, Amazon is 25% of Discretionary, Chevron is 23% of Energy, and Facebook is 24% of Comm Services. But adding one more sector to the list of top-heavy groupings is problematic.

Takeaway: adding Tesla to the S&P is a case study in the problems of responsible index investing, either in terms of broad indices or those which track individual sectors.

#2: Is “Sideline money” coming back into equity markets? Here’s what has happened to US money market fund balances since April:

  • According to Investment Company Institute data, peak money market fund balances in the US were the week of May 20th, at $4,789 billion.
  • Over the last 14 weeks (through August 26th) they have declined by $249 billion (7.1%) to $4,450 billion.
  • Most of that capital – 82% – has come out of institutional money market funds; which are 66% of all money market fund assets.

Takeaway (1): yes, money market funds are seeing redemptions but so far this is coming from corporations and very high net worth individuals that use institution products. Retail money market fund balances are declining more slowly. We’ve shown you this next graph of retail MMF balances back to 1980 before, but here it is again as a reminder that retail money market fund balances tend to remain elevated for 6-12 months during/after a recession:

Now, let’s look at the other side of the coin: where has long term capital gone since the end of May 2020? Here’s the ICI money flow data from May 1st to August 18th (latest available data):

  • $127 billion of net sales from domestic equity funds
  • $54 billion of net sales from non-US equity funds
  • Total out of equity mutual/exchange traded funds: $181 billion
  • $277 billion of net additions to taxable long-term bond funds
  • $41 billion of net additions to municipal bond funds
  • $21 billion of net additions to commodity funds
  • Total into bond/commodity funds: $339 billion

Takeaway (2): no, money market fund money (“dry powder”) is NOT going into equities, at least not enough for mutual funds and ETFs to show inflows. Rather, it appears to be landing in fixed income investments.