Decisions Loom for the S&P 500

The Cboe Volatility Index jumped 20% today as investors re-assesed the risk to the economy. But relatively speaking, volatility looks tame. The VIX ended the day at 33; it peaked above 80 in mid-March.

But now strategists are preparing for a different sort of volatility -- significant turnover in the S&P 500 index itself.

Barron's Reshma Kapadia writes that S&P Dow Jones Indices has already postponed the S&P 500 rebalancing that was supposed to take place in mid-March. And a spokesperson for S&P Dow Jones told Reshma that the firm hasn't yet disclosed how it will deal with the pandemic's impact. 

DataTrek strategist Nicholas Colas has done his own speculating. He notes that some 30 S&P 500 constituents could be replaced in the months to come. The index has a market cap requirement of $8.2 billion for new entrants, he notes. Many existing names have fallen below that level, thanks to the impact of Covid-19.  From Colas: 

Alaska Air, which was just added in 2016, is valued at $3.5 billion, for example. Apparel maker PVH has a market cap of $3.1 billion, as does iconic brand Harley-Davidson.

My own screen, for what it's worth, shows that 80 S&P 500 constituents are now valued at less than $8.2 billion. Colas adds: 

The S&P committee is going to have to decide how long they want to wait before ditching Covid-damaged companies from the 500, and there are certainly enough to allow them to dramatically remake the index if they so choose.

The problem is that S&P Dow Jones puts other rules in place for inclusion in what's supposed to be a "passive" index. Colas notes, for instance, that companies have to be profitable in the quarter before they're added to the index. And there are plenty of big companies that will struggle to post a profit this quarter. 

The bottom line, Colas writes, is "the S&P 500 may be the world’s most-followed passive index, but Covid-19 and its aftermath is going to force its constructors into some very active choices."