The big rebound from the March crash continued in July, thanks to ongoing strength in technology stocks, big speculation in biotechs racing to develop vaccines to fight the COVID-19 virus and recovery in some parts of the economy.
The NASDAQ and NASDAQ 100 indexes just delivered their best four-month performances since 1999, up nearly 40% each. (It's 61% if you're measuring from the market bottom on March 23.)
The Dow Jones Industrials and S&P 500 had their best four months since 1998.
The Dow rose just 2.4%, with the S&P 500 up 5.5%. The NASDAQ, by contrast, added 6.8% while the NASDAQ 100 was up 7.4%.
The Dow is still down 7.4% for the year, while the S&P 500 is up just 1.25%. The NASDAQ is up 19.8%, and the NASDAQ 100 jumped 24.9%.
Potential Negative August Surprise...
But historically, August has been known to produce some nasty surprises.
- Stocks sold off in August 2015 after China surprised global markets by devaluing its currency.
- A battle erupted in the summer of 2011 between Republicans and the Obama Administration over debt limits that nearly caused a default on US debt.
- Market sentiment was awash in dread during August 2008, over the condition of the financial system. The system crashed a month later.
- And in 1990, Iraqi dictator Saddam Hussein invaded Iraq.
August 2020 offers its own risks. To start: can the market continue to rise? Or will someone or something trigger a selloff?
The biggest worry now is whether Congress and the White House can agree on a relief package to help Americans who lost jobs because of the coronavirus pandemic. It's also caused major damage to many sectors, especially travel, food and entertainment.
An additional headwind—the Presidential election, which is shaping up to be extremely tense, especially in the aftermath of the George Floyd killing in Minneapolis.
...But Some Unexpected Upside As Well
To be sure, investors also found a lot to make them happy. Technology shares, especially big tech shares were strong in July.
Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), Advanced Micro Devices (NASDAQ:AMD) and Zillow (NASDAQ:ZG) all hit 52-week highs on Friday.
Amazon.com (NASDAQ:AMZN), which gained 14.7% in July, is up 71% on the year because, love 'em or hate 'em', they are perfectly situated to supply consumers with exactly what they want without having to leave their homes.
Tesla (NASDAQ:TSLA) soared 32.5% in July and is now up 242% on the year. The electric carmaker seems to be the stock day traders like to move around.
It is now also being touted as a candidate for inclusion in the S&P 500. That could roil markets for some time because it sports a $267 billion market cap. That would require selling stocks in an index fund to make room for the weighting of Tesla shares.
While the tech sector generated most of the market excitement, the search for a vaccine to combat the coronavirus fueled a speculative frenzy in stocks of companies doing the research.
Moderna (NASDAQ:MRNA), which is starting a phase 3 trial of its vaccine, was added to the NASDAQ 100 during the month. Its stock was up 15.4% in July and overall has gained nearly 279%.
But there's lots of competition. Pfizer (NYSE:PFE) and its German partner BioNTech (NASDAQ:BNTX) won a $1.95 billion federal contract to supply 100 million doses of its potential drug. Pfizer ended July as the top Dow performer with a 17.7% increase.
Meanwhile, Novavax (NASDAQ:NVAX), a small Maryland biotech, continued to soar during July. The company has won $1.6 billion from the Department of Health and Human Services to advance its drug.
Shares jumped 71% in July and are up 3,475% this year.
A number of home building stocks, including D.R. Horton (NYSE:DHI), Lennar (NYSE:LEN) and PulteGroup (NYSE:PHM) were among the leading S&P 500 performers because the housing market rebounded from the effects of the lockdowns in many markets in March and April.
That helped other related segments as well, including paint maker Sherwin-Williams (NYSE:SHW), which hit a 52-week high of $659.87 on July 28 and ended the month up 12.1%. Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) moved higher in July, each continuing a big second-quarter rebound.
Another beneficiary of the US health situation continues to be Clorox (NYSE:CLX), which has benefitted from American consumer efforts to keep COVID-19 at bay. The stock had a good July; it rose 7.8% and is now up 54% on the year.
Another group of stocks that did well were buoyed by investor worries. Gold, silver and copper all saw sizable gains because of fears about markets and the virus. Newmont Goldcorp (NYSE:NEM), one of the biggest producers of the yellow metal, was up 12.1% in July and 59% year-to-date.
Commodity prices also moved higher as the dollar fell about 4% in the month.
That's a number one normally sees for the global reserve currency on an annual basis.
Energy shares, however, did not participate much in the market's gains because oil prices couldn't push much above $40 a barrel and are down about 34% year to date. Oil and gas drilling, whether offshore or in West Texas, has been cut way back as oil and gas companies struggle to conserve cash.
The US rig count has dropped nearly 77% since the end of 2018. ConocoPhillips (NYSE:COP) fell 11% in July and is off 52% on the year. Chevron (NYSE:CVX) dropped 16.9%. Exxon Mobil (NYSE:XOM) dipped 5.9%. Both are off more than 30% for the year.
Boeing (NYSE:BA) didn't participate at all in the July rally. Shares of the aerospace giant fell 13.8% in July. The stock is off 52% this year and 64.6% from its all-time high of $446.01, reached in early 2019.
The company is now being propped up by its defense business. Airlines aren't ordering new planes and some are trying to cancel existing orders. Boeing may even consolidate manufacturing operations, moving the Seattle production of its 787 Dreamliner to South Carolina. That could cost upwards of 20,000 jobs.
Traditional retailers didn't have much to celebrate in July either. J.C. Penney is in Chapter 11 bankruptcy, and its management hopes to sell the company and avoid a liquidation. Just after July came to a close, luxury department store chain Lord & Taylor filed for bankruptcy too.
Macy's (NYSE:M) is hoping to avoid bankruptcy and Nordstrom (NYSE:JWN) is attempting to pivot to more of an online business.
6 Fundamentals To Watch
What's ahead for the market depends on six key factors:
1. Valuations. A pullback of the big winners since the March bottom is possible, especially for stocks like Tesla and Amazon. Share prices were high before the pandemic hit this past winter, and a market pullback was inevitable. (It was just more painful than anyone expected.) The NASDAQ and NASDAQ 100 have both recovered all their losses and then some. The relative strength index for the NASDAQ 100 topped 75 on July 13, a clear signal the index was overbought. The index promptly fell back and remains 1.5% below its 52-week high.
2. An actual COVID-19 vaccine leading to control of the virus. If one vaccine works and doesn't have bad side effects, that would generate enormous euphoria. In the meantime, people must find ways to avoid catching the virus.
3. The Federal Reserve. The US central bank has said it will do anything and everything to support the economy. So, an interest rate increase of any kind isn't likely this year or next. But the Fed and Donald Trump or Joe Biden will have to watch the dollar. In theory, a lower dollar boosts exports and limits imports. But a lower dollar can also mean investors want to take the money elsewhere. Hence, the 10-year Treasury yield will probably hover between 0.5% and 1.5%. If you're buying or building a house or refinancing, now's the time.
4. A deal on relief to schools, families and cities from the federal government. Without some additional help, financial disruption could be widespread.
5. The US election. Domestic tensions have been rising since the Senate did not vote to remove President Trump in February, after his impeachment trial. They've only grown in the aftermath of the George Floyd killing.
6. China. Remember them? US-Sino trade talks have gone nowhere since the winter. The US and China have now embarked on a tit-for-tat diplomatic dispute, with each ordering consulates of the other to be shut down. It's not clear where this relationship is headed next, except that it won't be pleasant.
As market uncertainty ratchets up, here are some stocks worth thinking about:
Retailers dealing in staples: Walmart (NYSE:WMT), Target (NYSE:TGT), Home Depot, Lowe's and supermarket chains like Kroger (NYSE:KR).
Online retailers. Dare we say it? Amazon remains a winner, though the share price is probably too high.
Online payment services. PayPal(NASDAQ:PYPL) makes it easy to buy that Grover Cleveland political cartoon you crave as well as just about anything else your heart desires.
Home-improvement products. Sherwin-Williams. The paint giant also owns the Valspar brand. Sheltering-in-place may add urgency to home redecoration, but if home sales remain steady, buyers will also want paint.
Commercial transportation companies. Think United Parcel Service (NYSE:UPS), FedEx (NYSE:FDX) and traditional railroads. Keep an eye on Kansas City Southern (NYSE:KSU), which may be a takeover play.