Markets

SEC Chair Clayton says he's worried about short-term trading in stocks like Tesla

Key Points
  • Clayton's comments came after CNBC's Andrew Ross Sorkin asked if eye-popping rallies in stocks like Tesla are cause for alarm.
  • Clayton said the SEC has issued guidance to brokers and investment advisors on how to give individuals proper warning about the risks they face when allocating capital in select stocks.
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SEC Chairman is worried short-term trading is causing certain stocks to skyrocket

Securities and Exchange Commission Chairman Jay Clayton said Thursday he is concerned that individual investors are deploying money for risky, short-term trades and causing the price of certain stocks to skyrocket.

Clayton's comments came in response to a question from CNBC's Andrew Ross Sorkin, who asked the regulator if eye-popping rallies in stocks including Tesla are cause for alarm.

"Here at the SEC, when we think about that investor, we think about someone who's investing for the long term: investing over time, doing it on a monthly basis," Clayton said. "What we are seeing is significant inflows from retail investors, and they have the hallmarks of short-term inflows. And does that concern me? Sure."

"Because that's more trading than investing," he continued. "Short-term trading is much more risky than long-term investing, and so I do worry."

Though the SEC chief didn't mention Tesla by name, the meteoric rise in the electric car maker's equity over the last year has left analysts and investors wary that the price reflects more emotion than business fundamentals.

Tesla, which on Wednesday posted its fourth straight quarter of profits, is now worth more than Ford and General Motors combined while delivering just a fraction of the volume of automobiles.

Elon Musk's carmaker is now worth about $300 billion, the result of a 512% increase in its stock price over the last 12 months.

Clayton added that the SEC has issued guidance to brokers and investment advisors on how to give individuals proper warning about the risks they face when allocating capital in select equities.

"I hope people are heeding that," he said.

Though some analysts have argued that Tesla's newfound valuation may reflect a long-term belief that the company will lead a broader, nationwide shift to electric cars, others have decried the spike as disconnected from reality.

JMP Securities, for example, downgraded Tesla equity on Tuesday ahead of earnings, saying: "We cannot arrive at a reasonable basis for arguing that the stock should be valued above current levels, even considering our fundamental outlook."

Morgan Stanley's widely followed autos analyst, Adam Jonas, noted last week that "the power of hope" is taking an ever-more-important role in Tesla's climb.

Tesla's stock rose 4.2% in premarket trading Thursday morning as investors applauded the better-than-expected financial results it released Wednesday evening.

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