In case you missed it, this has been a pretty monumental past couple of days for Wall Street and investors. We watched the benchmark S&P 500 (SNPINDEX:^GSPC) ascend to new all-time closing and intraday highs, saw Apple (NASDAQ:AAPL) and Tesla enact stock splits, and witnessed a shake-up in the iconic Dow Jones Industrial Average (DJINDICES:^DJI) that saw three new stocks enter the Dow -- and three brand-name companies get their walking papers.
Arguably, it's the stock splits of the largest (Apple) and eighth-largest (Tesla) companies by market cap that have garnered the most attention.
Stock split mania has arrived on Wall Street
When a company chooses to split its stock, the perception from investors is that the post-split price is "more affordable." Even though a stock split has no bearing on a publicly traded company's market cap, it reduces its share price, which can be an attractive proposition for investors that don't have the ability to invest in fractional shares. Whereas it took roughly $500 and $2,200, respectively, to buy a single share of Apple and Tesla last week, you can do so this week for around $129 and $498, after their incredible rallies on Monday.
Because stock splits have absolutely no effect on a company's market cap or fundamentals, Apple remains the largest company in the U.S. by approximately $500 billion over Microsoft. This means Apple has the greatest influence on both the Nasdaq Composite and S&P 500, both of which are market-cap-weighted indexes.
But the fact of the matter is, Apple's time in the spotlight for the Dow Jones Industrial Average has come and gone.
Apple just doesn't matter as much anymore for the Dow Jones
You see, the Dow Jones is a price-weighted index. This is to say that a company's share price determines point movements within the index, and market cap has nothing at all to do with weighting. Prior to its split this past weekend, Apple had a share price of roughly $500. This was almost $190 a share higher than the next-closest Dow stock (UnitedHealth Group), and it meant Apple was responsible for close to 3,400 of the Dow's 28,654 points (as of Friday, Aug. 28). Put another way, Apple was 11.8% of the weighting for the Dow Jones Industrial Average.
But that's not the case following its 4-for-1 stock split. Even after a nice rally on Monday, its first day in the post-split environment, Apple closed just above $129 a share. Though it's still the largest company in the U.S. by market cap, it's now only the 17th-most influential stock in the Dow. Despite having respective market caps of $71 billion, $77 billion, and $96 billion, Goldman Sachs, Caterpillar, and Boeing are now more important to the Dow than Apple and its $2.2 trillion market cap.
Furthermore, of the nearly 10,000-point rally in the Dow Jones between its March 23 bottom and Aug. 31, Apple accounted for close to 2,000 points. Without Apple, the Dow would be performing a lot worse than down 0.4% for the year. Following its split, Apple could have a hard time being a leader for the storied index.
Apple's split exposes numerous faults in the Dow
While the Dow Jones has found itself in the mainstream spotlight since its debut in 1896, it lost its relevance a long time ago. The simple fact that it's a price-weighted index makes it highly fallible and not in any way indicative of the health of the U.S. economy and stock market.
And that's not all.
Because the Dow only consists of 30 multinational companies, placement within the index comes at a premium. This is to say that not every sector or industry has representation in the Dow. Currently, there's just one energy company, one materials company, and zero utilities or real estate stocks in the iconic index. By comparison, you'll find representation for these sectors in the S&P 500, which is a market-cap-weighted index of 500 companies.
What's more, the Dow's focus on share price also means it's an exclusionary index. Companies that choose not to split their stock and have very high share prices would never be able to join the Dow because they'd exert too much influence. This means Amazon, Alphabet, and Berkshire Hathaway would never be included in the Dow, despite the fact that they're ranked Nos. 3, 4, and 7 in market cap among publicly traded U.S. companies.
Apple should be very relevant for equity indexes, but its recent split has once again placed the microscope over the Dow's numerous faults.