Stock splits are a 'follow the leader' trend for companies: Strategist

Apple and Tesla's stock split goes into effect today, leaving investors wondering how other companies will react. LPL Financial Chief Market Strategist Ryan Detrick joins the On the Move panel to discuss.

Video Transcript

ADAM SHAPIRO: Let's talk about what's happening on the Dow. And we want to bring into the stream Ryan Detrick. He is LPL Financial's chief market strategist. He's joining us from Charlotte, North Carolina. It's good to have you here.

And I guess from an investment standpoint-- let's talk about who's in and who's out first on the Dow and what this truly means. I mean, Exxon Mobil's out. Chevron is still in. But Salesforce is now in. Amgen is in, Honeywell. What is this telling us?

RYAN DETRICK: Yeah, well, right here, guys-- I mean, if you look back at history, OK, once you're added, the next year, you tend to underperform a little bit. The guys that get kicked out actually did a little bit better. And that's kind of from a psychology point of view. You're probably getting kicked out because you're not doing that great and you're probably getting added because you're doing pretty good. So that's just something to be aware of.

But the thing that gets us, I guess, the most, when you talk about the stock split that Apple is going to have and then just kind of the makeup of the Dow after these changes, there is less tech now than there was before. And you look at the Dow, we'll call flat for the year, give or take, S&P up 8% or 9%, obviously NASDAQ up 30%. I mean, if tech continues to be a leader-- like we've said-- come on you guys for a while, said we like technology, we like growth here at LPL Research. If that keeps happening, this change that was just made, it's probably just going to kind of continue. We're going to continue to see that, is the honest truth here.

BRIAN CHEUNG: Hey Ryan, it's Brian Cheung here. So, obviously, the big news today, obviously, with the stock splits becoming effective, specifically for Tesla and Apple, and I'm wondering, those are two large tech company names that have just benefited amazingly over this rally. But I'm wondering with the advent of fractional trading, it's not like those stock splits really mean all that much. But because of this, it might be more of a signal from these healthy companies that yeah, our stock price can go higher. Is that a trend that you expect to see even more so in the following months, despite the economic uncertainty, that maybe other stocks, other large-cap companies might try to do the same?

RYAN DETRICK: Yeah, it's kind of follow the leader, right? For years, we didn't have stock splits. And you probably could have. And now we're starting to see them.

Also, I think it was like something like Thursday or Wednes-- Wednesday or Thursday last week was the official 20-year anniversary of when stock prices would go by the decimal point. They used to be fractions, like you said. So that's kind of a happy anniversary on that one.

But, I mean, it's really unique, when you think about is it really matter? Does Warren Buffett, who just had his 90th birthday yesterday, as a lot of us talked about, is he splitting his shares? No. Is there any main reason, is there any major benefit to it? At LPL Research, we'd say probably not. It's not going to change the fundamentals of this company.

But, obviously, just this morning, "The Wall Street Journal" had a good article that showed how the small traders are making up like 25% of the overall volume, by far the most we've seen over the past 10 years at least. So yes, people can trade those fractional shares, so it is a little easier. But still, I think these companies are wanting in on the action. And the lower stock prices or by the stock-- the meaning of a stock split, it seems like a trend that we're probably going to continue to see here over the coming, we'll call, at least next year or two, probably.

ADAM SHAPIRO: Well, part of that trend is fueled by the fact that "The Wall Street Journal" article today that individual traders are back in this market, approaching something like 20% of the volume. But I wanted to ask you, Ryan, is that somewhat misleading as to the true value of stocks which are being traded when we see these kinds of volume movements?

RYAN DETRICK: Oh, I mean, let me put it this way-- I guess when we had that 10-year bull market-- I know it ended and now we've got a new bull market, potentially-- I heard the whole time up, volume is light, it's a warning sign. I mean, I hate to say this time is different, the four most dangerous words to investing. But honestly, guys, volume is not quite what it used to be. And I don't think that's quite the warning sign.

But getting to what it means right now, obviously, a lot of the small traders have been involved and done really well. We're up, what, 60% in the last five months. And they've picked some of those names that have done well and they've jumped in there.

So that contrarian in you starts wondering, hmm, could the small traders be getting in here at a major peak? And is this a warning sign? We'd say maybe a near-term peak.

I mean, September is the worst month of year. We're going to hear a lot about that tomorrow. And in election year, September and October tend to have a pullback. So maybe if there's a little too much froth here with the individual investors getting excited and some of these stock splits, maybe a well-deserved break after 60% rally is just what the market needs here.

JULIA LA ROCHE: So let's continue that conversation, Ryan. And do you think that the market has more room to run here as we head into-- I mean, we're already in the back half of the year. But as we get toward the end of the year, what is sort of your outlook there? And what are some of the things that investors should be paying attention to? You mentioned the election being one of them.

RYAN DETRICK: Yeah, I mean, clearly, the election's going to be forefront. But honestly, if the economy keeps opening up-- I mean, look at the data, right? FactSet said 98% of companies have reported. And 84% of them just beat in the second quarter. And forward guidance was good. The housing data is just unbelievable.

So as long as the economy keeps opening up, we still think that this bull market is alive and well. But after the big stretch we've had, the 60% rally, maybe a break makes sense. But looking out into the future, what did the Fed say last week, right? Lower for longer is here to stay. The Economy is opening up.

We're going to get a fiscal plan eventually. But I'm kind of shocked as anybody else, right? Six all-time highs in a row and we still don't have that new-- that plan from Congress, which I think is surprising that the market's doing this well. But I think it's all about the economy, which keeps defying the skeptics and improving.

ADAM SHAPIRO: Ryan Detrick is LPL Financial chief market strategist. Ryan, I don't if you can see it, "This Time is Different." The book is on the shelf right above the other book which is "The Subtle Art of Not Giving"-- I'm not going to say it. All the best to you, buddy.