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Stock Markets Fall as Tesla Prepares to Join S&P 500; Share Move Hits Virgin Galactic

By Dan Caplinger - Dec 18, 2020 at 12:40PM

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The stock market appears to be finishing the week on a weak note.

Investors took a pause on Friday morning from the record run on Wall Street, with major market benchmarks giving up modest amounts of ground. Most investors have their eyes squarely focused on Washington, where they're counting on legislators and government officials to find an agreement to help the American economy get through the rollout period for coronavirus vaccines amid new record cases of COVID-19 across the nation. Just after 11:30 a.m. EST, the Dow Jones Industrial Average ( ^DJI 0.00% ) was down 198 points to 30,106. The S&P 500 ( ^GSPC 0.31% ) fell 23 points to 3,699, and the Nasdaq Composite ( ^IXIC 0.00% ) lost 32 points to 12,733.

One stock that wasn't falling was Tesla ( TSLA 1.64% ), which is going through a momentous occasion after the market closes Friday afternoon. For Virgin Galactic Holdings ( SPCE 3.97% ), however, news that current shareholders will have a massive block of stock potentially available for sale was a downer for the share price.

Tesla gets ready

Shares of Tesla were surprisingly calm in Friday morning trading, with the price up about 1.5% as of 11:30 a.m. EST. That doesn't mean there won't be fireworks later in the day, though, as Tesla prepares to formally join the S&P 500 Index.

Top of a Tesla charging station.

Image source: Tesla.

For several weeks, Tesla investors have anticipated this day. The electric vehicle stock will become part of the S&P 500's calculations before the opening of trading on Monday, Dec. 21, making today the last opportunity for those looking to track the S&P 500's performance to align their holdings with those of the index going forward.

Given Tesla's market capitalization, which is currently above $600 billion, index investors will need to have bought large quantities of the automaker's stock in order to match the S&P 500's returns. With today already being a typically volatile market day due to the simultaneous expiration of index futures contracts, stock and index options, and single-stock futures, the S&P 500 reconstitution is only adding an extra helping of uncertainty to the mix.

Given the huge run higher for Tesla stock since the S&P announcement, many investors expect Tesla to give up ground next week. Yet that's far from a certainty, and those who've bet against the electric vehicle pioneer have been repeatedly disappointed for years now.

Will shareholders bail out of Virgin Galactic?

Elsewhere, shares of Virgin Galactic were down 2%. The stock had fallen as much as 7% earlier in the session, as the space tourism company's share float was set to expand massively.

Virgin Galactic filed a prospectus with the U.S. Securities and Exchange Commission late Thursday that will register almost 113 million shares of stock and warrants. The move allows shareholders who owned previously restricted stock the right to sell their shares on the open market if they so choose. Virgin Galactic itself won't receive any proceeds from any sales, should they occur.

It's important to understand that even though the prospectus makes it look as though a sale is imminent, there's no necessary connection between the registration statement and any future sale. Virgin Galactic is filing the prospectus merely to fulfill its obligations to give early investors registration rights for the stock and warrants they purchased.

At this point, Virgin Galactic investors were already anxious about the fact that a recent test flight failed to produce a successful outcome, potentially delaying its timeframe for commercial space flight. If the registration statement leads some early investors to sell their shares, then Virgin Galactic stock could have a rocky ride for a while.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Tesla, Inc. Stock Quote
Tesla, Inc.
$1,068.96 (1.64%) $17.21
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$35,719.43 (0.00%) $0.00
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$4,701.21 (0.31%) $14.46
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$15,686.92 (0.00%) $0.00
Virgin Galactic Holdings, Inc. Stock Quote
Virgin Galactic Holdings, Inc.
$16.24 (3.97%) $0.62

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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