The stock market ended August with its fifth monthly gain, as one of the strongest rallies since 2000 continued to rise.
Indeed, this meeting looks like it has enough momentum to last for a while. There is one big reason for this, of course: the Federal Reserve to get people back to work. It is also unlikely to lead to an increase in interest rates from ultra-low levels this year or next.
It is up 77.6% since its low on March 23; it is up 59.7% over the same time and it is up more than 56.1%.
Best August in Years
Over the period, by far the strongest players have been the tech-heavy NASDAQ and indices, 31.2% and 38, respectively, 7% up. Both hit new highs on Monday and have regularly hit record levels since mid-summer. In that time, the SPX has gained 7% and hit its own new highs.
NASDAQ Composite Monthly Chart
And as of Friday, the Dow Jones has finally recouped all the losses caused by the pandemic, rising 0.4% over the year. But Monday's 224-point loss brought the index back into negative territory for the year, down 0.38%.
Overall, this major index performance offered investors the best August in years since 1984 for the Dow and S&P 500 and 2000 for the NASDAQ.
Since the March crash, technology stocks have benefited the most from risk appetite. Amazon.com (NASDAQ 🙂 CEO Jeff Bezos net worth has risen to $ 200 billion. Additionally, four companies – Apple (NASDAQ :), Microsoft (NASDAQ :), Amazon and Alphabet (NASDAQ 🙂 – each ended the month with market caps of $ 1 trillion or higher. Apple's market cap is a whopping $ 2.2 trillion dollars.
While investors are ecstatic, they should also be wondering when this meeting will end. Here are 6 ways this can happen:
1. When the Fed starts to raise interest rates
As we noted above, it will happen this year or next year not, as central banks around the world continue to deal with the devastation COVID-19 has wreaked. But if rates do go up, watch out.
Low interest rates create risk because many investors looking for returns can now only get a reasonable return from stocks. It was 0.69% yesterday, compared to 2.446% at the end of 2016 and 6.43% at the end of 1999.
Monthly Graph of US Treasuries by Ten Years
Because of the pandemic, the money is focused on a few asset classes, notably technology stocks, housing, digital entertainment, and consumer staples with the infrastructure to deliver value and efficiency. Think Amazon, Walmart (NYSE :), Target (NYSE :), Costco Wholesale (NASDAQ :), Home Depot (NYSE :), and Lowe & # 39; s (NYSE :).
Apple, whose shares split 4-for-1 on Monday, is up 75.8% this year. Based on its weighting on the 30-component Dow, it has itself added 1,400 points to the megacap index and represents approximately 14% of the NASDAQ 100's market cap.
2. When technology stocks sell out and other sectors fail to absorb the slack
Growth stocks have ruled it since March. Value stocks on the other hand, including banks, traditional industrial companies and the like, have struggled. Tesla (NASDAQ :), which shared 5-for-1 Monday, is up more than 496% this year – nearly 74% in August alone. A major sell-off in technology would likely be triggered by an abrupt rise in interest rates or a geopolitical event such as a new eruption of tensions between the US and China.
The risk to growth stocks appears to be increasing. The relative strength indexes (RSIs) for the NASDAQ and NASDAQ 100 both approached 77, suggesting that both indices are overbought. The S&P 500, whose rally was fueled by growth stocks, also has an RSI of 77.
The S&P 500 last saw those levels in January and February, indicating a sell-off in the first quarter. Indeed, that sale was a monster.
3. When the nascent domestic recovery stagnates
You can see a recovery in the swelling sales of single-family homes, prompted by families trying to avoid the pandemic. come. If home sales are robust, that's good for appliance, tool and paint sales. Shares of Sherwin-Williams (NYSE 🙂 are hovering around their 52-week high and are up more than 16% this quarter alone.
Likewise, the shares of railways, transportation and logistics companies have risen as investors clearly expect a recovery to accelerate. It's up 2.6% for the year. Landstar (NASDAQ 🙂 is about 9.3%. JB Hunt Transport Services (NASDAQ 🙂 is up nearly 10% this month. Parcel delivery giant FedEx (NYSE 🙂 is up 30.6%.
But resisting this rosy scenario is the real prospect of massive layoffs in airlines, hotels and other hard-hit industries, and workers who were on leave are told their jobs have disappeared. At the same time, the pandemic has broken out over and over, forcing schools, colleges and businesses to close and devastating public finances.
4. When November's election goes to court
If he loses, no one expects Donald Trump to leave without a fight. So if the combination of the slow vote count and Trump trying to get a win through the court comes to the fore, the domestic stress could be greater than when the Bush-Gore race went all the way to the Supreme Court in 2000.
5. When oil prices rise sharply
Saudi Arabia and Russia (along with shale drilling machines in the United States) are desperate for higher oil revenues, but COVID-19 has undermined travel and massive amounts of local economic activity. . A sudden and rapid rise in oil prices, caused by a war in the Persian Gulf, for example, could easily stifle a recovery. Record oil prices in the spring and summer of 2008 really contributed to the Great Recession.
It doesn't look likely now. , the global benchmark, fell below $ 20 in March and has nearly tripled since then. But at about $ 45 a barrel, Brent is still down 31% for the year and 48% from a peak in 2018.
6. If the meeting is not uniform
The, following smaller companies, is still down 5.4% for the year. Unless they're among the select few, such as Moderna (NASDAQ 🙂 or Novavax (NASDAQ :), with a potentially promising coronavirus vaccine in the pipeline, biotech stocks are struggling.
Russell 2000 Monthly Chart
Moderna was down 12.4% in August, but excitement over the vaccine's potential success has pushed its stock up 232% this year – even though the company has never launched a drug on the market. Novavax is also down about 25% in August. But its shares are still up 2,672% this year.
Eighteen of Dow's 30 shares are down for the year, even after adding biotech giant Amgen (NASDAQ :), industrial conglomerate Honeywell International (NYSE 🙂 and software company Salesforce.com (NYSE :). (Removing Pfizer (NYSE :), Exxon Mobil (NYSE :), a Dow member since 1928, and Raytheon (NYSE 🙂 Technologies (NYSE :).
It's one thing to have a big technology-driven gathering. But as the dot-com bust showed, tech can't do it alone.
Dow's current winners are Salesforce, Apple, Nike (NYSE 🙂 and Disney (NYSE :). The weakest performance is Cisco Systems (NASDAQ :), down about 10.4%.
Top S&P 500 stocks for August were MGM Resorts International (NYSE :), Royal Caribbean Cruises (NYSE :), aluminum manufacturer Arconic (NYSE :), fertilizer company Mosaic (NYSE 🙂 and Salesforce.com.
Benchmark weakest performers: Nektar Therapeutics (NASDAQ :), medical device company Becton Dickinson (NYSE :), cloud services company Arista Networks (NYSE :), oil company Occidental Petroleum (NYSE :), and utility Evergy (NYSE 🙂 .
Airlines continue to struggle. American Airlines Group (NASDAQ 🙂 and United Airlines (NASDAQ 🙂 are each still down more than 50% and have warned workers about the massive layoffs this fall.
There is an old saw in financial circles: don't fight the Fed. If you think inflation is about to explode, remember that the Fed and its significant power to influence financial markets are likely to weigh against your position at this point. Investors who have tried to make that trade work in recent years have learned painful lessons.
At the same time, markets could be derailed by a completely unforeseen event like the COVID-19 panic, which fell one third of the value of US stocks in about a month.
This is an important point to keep in mind given the high valuations that stocks now have in a volatile economic and political environment.
