Market Perspective 08/14/2020

What would you rather have, a $100 bill or five $20s? Your psychological preference might be for the $20s, even though economically, they are worth the same amount. 

Recently, two well-known companies, Apple and Tesla, announced stock splits. When a company goes through a stock split, they are effectively reducing the per-share price and giving investors more shares. The result is shareholders have the same value after the split that they did before. In the case of Apple’s 4-for-1 split which is expected to occur August 28th, the stock price will be divided by four, and each share will be multiplied by four. For example, an investor who owns 100 shares valued at $460/share would have 400 shares valued at $115/share. Either way, the investor owns $46,000 worth of the company.

Why do companies do stock splits if there is no change in value? A lower share price is more accessible to a broader base of investors and could increase liquidity by having more market participants able to buy and sell the stock. Also, there’s a psychological component. If a stock’s price rises too much, investors may view the stock as too expensive and not purchase. Once a split occurs, the price may be viewed by the market as more attractive.

Share splits occur automatically, and there’s no action for investors to take. Importantly, there are no tax implications triggered for investors as a result of a stock split. Also, the tax cost basis is adjusted, leaving unrealized capital gains or losses unchanged.

Market Comments

• Broad global stock markets were positive on the week, led by developed international stocks which as a group were up about 2% (source: Factset, Inc)

• The U.S. 10 year treasury bond yield has increased recently to 0.71%, up from 0.51% set on August 4th, which was near a record low (source: Factset, Inc)

  • The increase in treasury yields was in part attributed to weaker investor demand during the recent treasury auction

  • For traditional bonds, yields and prices have an inverse relationship; rising yields have put downward pressure on treasury bond prices

• Retail sales data for July showed an increase in sales of +1.2% vs prior month however missed expectations; weak vehicle sales during the month negatively impacted the overall data (source: U.S. Census Bureau)

• The U.S. government has secured deals with several drug companies working on a COVID-19 vaccine, with estimates approaching $9 billion in total contracts (source: Wall Street Journal)