Flying high. Stocks sailed into the weekend adding further gains making it the fourth straight week of growth. Friday’s Flash PMIs show that the economy is expanding and sales of existing homes logged a record monthly growth.
N O T E W O R T H Y
Splitting headache. On Friday, the S&P500 inched its way to another all-time high. What, no balloons or fanfare music? OK, OK the index making a new high is actually a good thing by historical standards, as it does typically log gains in the six months that follow. The would be good news for the index but not necessarily good news for all of its 500-ish member stocks. I have written quite a bit about the S&P being dominated by tech stocks. As recently as last week, I talked about the S&P making new highs on weak breadth, which means that there were more losers than gainers amongst index members. Making new highs on weak breadth happened again on Friday and in that case it was Apple to blame. The company made history last week, becoming the first company to breech the $2 trillion market capitalization level. Apple is big! “How big is it, Mark,” you ask. It is so big that when it goes up by over +5% as it did on Friday, the whole index gets a boost. Apple’s index domination goes beyond the cap-weight S&P and Nasdaq indices. The Dow Jones Industrial Average too, is under Apple’s influence, but for a different reason. The Dow Jones Industrial Average is a price weighted index which, believe it or not, assigns larger weights to its members with higher prices. Apple, which closed at $497.48 on Friday has an 11.7% weight in the calculation of the index while Pfizer only has a weight of 0.95% because its stock is far cheaper ($38.88 per share). Imagine if Tesla, which traded above $2000 per share last week, was a member of the Dow Jones Industrial Average Index. If you have been following the news on Apple and Tesla, you might recall that something very interesting is going to happen a week from today. Both stocks will begin trading at a split level. Apple has announced a 4 for 1 stocks split while Tesla will trade 5 shares for 1. Back in the old days (like 2 years ago), a stock split was good because the reduced share price meant that smaller, retail investors could buy expensive stocks. If you only had $500 to invest, you could not open a position in Tesla with its $2000 entry level pricing. These days, many dealers that cater to smaller investors offer fractional shares (meaning you can actually buy less than 1 share), making a stock split merely an accounting exercise these days. Remember that if you already own a stock that is trading at $100 and it splits 4 for 1, you will now own 4 shares that trade at $25. If the stock paid a $1 per share dividends, you would receive only $0.25 after the split, but it would be paid 4 times, one for each new share that you own. So there is no real benefit to existing shareholders or even prospective buyers other than a cheaper share price. But don’t tell that to the new army of merry day traders over at the no-frills online-only brokers. For them a cheaper stock appears to be a bargain, even though the PE multiple remains the same along with the stock’s dividend yield. If you liked Apple at $497, you should love it at the bargain price of $124 (if the 4 for 1 split happened today). In this case perception may actually be reality as both Tesla and Apple rallied on the news of their pending splits. But there is an actual reality which is noteworthy. Remember Apple’s influence on the Dow Jones Industrial Average? Yep, that is going to change once its share price gets knocked down fourfold next week. The next highest share price on the index is UnitedHealth Group (UNH) from a completely different sector. Healthcare has done well this year adding +4.63%, but the sector was eclipsed by the Tech sector which grew by +28.55% year to date. Had Apple's split occurred earlier, the Dow may not have experienced the same recovery as it did. For the record, though the Dow had a good day on Friday as well (thanks for Apple), the index is still -5.4% below its all-time high made on February 12th. With the big Apple about to become less big, we may witness the Dow Jones lagging further behind the other indexes.
THE MARKETS
Stocks traded up on Friday in response to expansionary PMIs and a booming housing market. The S&P500 climbed by +0.34%, the Dow Jones Industrial Average rose by +0.69%, the Russell 2000 slipped by -0.76%, and the Nasdaq Composite Index added +0.42%. Bonds climbed and 10-year treasury yields gave up -3 basis points to 0.62%.
NXT UP
- Chicago Fed National Activity Index (July) may have slipped to 3.70 from 4.11.
- Later in the week we will get more housing numbers, the Conference Board’s Consumer Confidence, more regional Fed reports, Durable Goods, GDP, PCE Deflators, and University of Michigan Sentiment. Please refer to the attached earnings and economic calendars for details.