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How Apple Single-handedly Lifted Stock Markets Friday

By Dan Caplinger – Aug 21, 2020 at 5:26PM

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The $2 trillion company has huge influence.

By all appearances, the stock market continued to look healthy on Friday. Investors sent the Nasdaq Composite and the S&P 500 (^GSPC -0.10%) to new records, and the Dow Jones Industrial Average (^DJI -0.28%) enjoyed the largest gains among major market benchmarks on a percentage basis. Good news from the housing market gave market participants more assurances that the current economic recession won't be of the same magnitude as the financial crisis of 2008 and 2009. That's bringing hope that recent gains are not only sustainable but also just the beginning of a bigger rally.

Today's stock market

Index

Percentage Change

Point Change

Dow

+0.69%

+191

S&P 500

+0.34%

+12

Nasdaq Composite

+0.42%

+47

Data source: Yahoo! Finance.

Yet the breadth of gains in the stock market has been suspect for quite a while now, especially when you notice how the Nasdaq has performed so much better than the Dow. On Friday, that disparity came into even more shocking clarity. By itself, Apple (AAPL 1.14%) and its 5% rise accounted for Friday's gains. Without Apple, the broader stock market might well have looked more like the Russell 2000 index of small-cap stocks, which fell nearly 1% on the day.

Deep blue stock chart with two uneven lines.

Image source: Getty Images.

Apple has become the focal point of the market

Apple shares rose 5% today, although one would be hard-pressed to find any fundamentally sound reason for the move. Most of the discussion of the tech giant centered on its impending 4-for-1 stock split, which takes effect later this month. Others pointed out that surpassing the $2 trillion mark in market capitalization brought it more attention.

Apple's size alone can and does move the market. Consider:

  • Because of the price-weighted methodology for the Dow Jones Industrials, Apple's $24.38 per share rise on Friday added 167 points to the average -- nearly 90% of the day's upward move.
  • The S&P 500 is market-capitalization weighted, so price moves aren't as important as percentage moves. But even so, Apple's nearly 7% weighting in the S&P 500 pushed the S&P up by roughly 0.36 percentage points -- even larger than the 0.34% move in the index Friday.

Similar math applies to the Nasdaq-100 Index as well.

Apple's split will give it less influence in the Dow

Interestingly, Apple is voluntarily giving up some of its market-moving power by splitting its stock. After the 4-for-1 split, Apple's stock price will fall to roughly $125 per share. That'll reduce its current weighting in the Dow from nearly 12% to around 3%. With 30 stocks in the Dow, Apple will suddenly find itself with just an average amount of influence over the index.

For the S&P, though, the split shouldn't matter. Market capitalization won't be affected by the split. As long as demand for its shares continues, Apple will still be a dominant force with the popular large-cap benchmark.

Why investors need to understand the markets

Most investors are used to seeing indexes like the Dow and S&P and figure that they represent a diverse array of companies. Yet even though you'll find 30 Dow stocks and about 500 companies in the S&P 500, some pale in significance compared to the giants of the investing universe. As you're looking at the future prospects for the world's biggest tech companies, be sure to keep that fact in mind.

Dan Caplinger owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.

Stocks Mentioned

Apple Stock Quote
Apple
AAPL
$144.27 (1.14%) $1.62
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$33,688.04 (-0.28%) $-93.44
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$3,959.52 (-0.10%) $-3.99

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

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