The Best August Since 1986

Stocks are poised to have their best August since 1986.

It’s all thanks to a sharp technology-led rally since late March sending blue-chip stocks to a record high.

The S&P 500 index is up about 7.24% per cent for the month. If the gains hold until trading closes on Monday, that will mark the best August since the index’s 10.63% advance in 1984.

The bumper month caps the strong recovery that added nearly 57% to the value of the biggest U.S. stocks. 

Apple – the largest stock in the S&P 500 – has been the biggest contributor to the market’s gains this month. It is up 18% in August. Apple surpassed $2 trillion in market value for the first time earlier in the month.

The iPhone maker is joined at the top by Microsoft, Amazon, Alphabet and Facebook.

  • Together, these stocks make up more than a fifth of the S&P 500.
  • And have accounted for nearly a third of the gains since the recent rally began.

The outlook for corporate profits, although poor, has also begun to improve.

Earnings on a per share basis for the S&P 500 fell by a third in the second quarter. This is above Wall Street forecasts.

This strong showing has led some analysts to raise their profit forecasts for the year.

Another factor lifting market sentiment is the return of stock splits.

Two of the main companies behind Wall Street’s great coronavirus rally of 2020 – Apple and Tesla – have put stock splits back on the corporate agenda.

This may have added fresh fuel to the stock market’s recent advance.

Apple is giving its shareholders four shares for every one they already own. Tesla will complete a five-for-one split.

These moves have brought attention to an idea that had largely fallen out of favor.

The number of stock splits among companies in the S&P 500 topped 100 a year in the bull market of the late 1990s. But the number has dropped into the single digits since 2016.

The sight of two prominent companies returning to the idea — and the explosive growth in their shares in the days since — could change that.

Apple’s shares have climbed 32% since it announced surprisingly strong quarterly earnings last month, along with its plans for the split. Tesla stock has jumped 57% since news of its stock move on Aug. 11.

Stock splits have historically been good for stocks.

Research has long pointed to superior stock market returns from companies that split their shares.

Two studies from the mid-1970s to 2003, for instance, highlighted an excess return of 8% in the first year after a split, extending to 12%-16% over three years. 

The bull market is sparking a huge IPO boom. Over 108 private companies have filed to IPO. And I’m expecting a rush of new IPOs in early September.

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The Big News

Japan’s Prime Minister Resigns

Japanese Prime Minister Shinzo Abe announced his resignation on Friday. He said his declining health would make it difficult to carry out his duties. Abe suffers from ulcerative colitis. His ‘Abenomics’ policies have begun to turn around the Japanese economy.

Buffett Buys Into Japanese Conglomerates

Berkshire Hathaway said it has acquired slightly more than 5% of the shares in five large Japanese trading houses (conglomerates).

In a statement on Sunday, Berkshire said it acquired stakes in Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo over the past year. Berkshire said it intends to hold the investments for the long term and may boost its stakes to 9.9%.

Some States Ignore CDC

Eight large U.S. states are not heeding new CDC calls to reduce COVID-19 testing of some exposed to the virus. The states join a broad rebuke of the Trump administration by public health leaders. Arizona, California, Connecticut, Florida, Illinois, Texas, New Jersey and New York all plan to continue to test asymptomatic people who have been exposed to COVID-19.

Nevada Lab Confirms First Coronavirus Reinfection in U.S.

A public health laboratory in Nevada has reported the first confirmed coronavirus reinfection in the United States. This case is the first in the world known to have brought on severe symptoms. The patient is a 25-year-old man in Reno, Nevada, who experienced a second bout of infection just 48 days after his first.

A New Dow Industrial Average

The Dow Industrial index starts trading today with three new members. These are Amgen, Honeywell and Salesforce. Perhaps more important, the index contains a lot less Apple. Apple’s four-for-one stock split cut its weight in the Dow to 3% from 12%.

Gold Up, Dollar Down

The shift in Fed policy (more on that in a moment) sent gold and silver higher on Friday. It also sent the Bloomberg dollar spot index to its lowest level since May 2018. The bullish narrative for gold and silver remains. The narrative includes low interest rates for longer, a weaker dollar and massive amounts of stimulus.

NYSE Given Go-Ahead for IPO Alternative

The NYSE secured regulatory (SEC) approval for its proposal to let companies raise capital through direct listings. This opens the door to a rival to the traditional initial public offering. The decision will allow companies to issue new shares to the public in a process known as a primary direct floor listing. The process relies on an opening auction that matches buy and sell orders to set a company’s offering price on the day it lists.

Inside the Confidential Airbnb IPO

WSJ reports that Airbnb plans a secret +$18 billion IPO. That means the Silicon Valley giant is keeping details 100% confidential. Get details here: Inside Airbnb’s Confidential IPO.

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The Coronavirus Numbers

India now has the fastest-growing coronavirus caseload of any country in the world. It is recording more than 75,000 new infections per day. In the past week, India has reported nearly half a million cases.

Here are the numbers from Monday at 8 a.m. ET from John Hopkins University:

  • 25,245,930 Infected worldwide
  • 846,851 Deaths
  • 5,997,623 Infected in the U.S.
  • 183,068 Deaths in the U.S.

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What’s Next

The two big drivers of the stock market remains the coronavirus and Federal Reserve policy.

The Federal Reserve’s newly revised long-run policy goals, announced this past week, seems to lock in a now familiar pattern of investment behavior . . . .

That is a love of riskier assets in order to generate a return.

The message from Jay Powell at the annual Jackson Hole Symposium was simple: U.S. interest rates will sit in the basement for a very long time . . . perhaps even until after the Fed reviews the progress of its new framework in five years’ time.

The Fed is reacting to the economic side effects of COVID-19.

The global lockdown of economies has generated a massive output gap — the difference between the actual and potential output of an economy.

Closing the output gap may become a lot tougher as job losses continue.

High levels of unemployment so far have mainly been among lower paid workers in service sectors. The sectors are focused on leisure, retail and hospitality.

But next may come larger companies in professional services that cut higher income jobs. This is likely given companies’ focus on slashing costs and paying down debt.

So, expect the Fed’s policy to remain low interest rates forever and lots of stimulus.

This is great news for stocks because it means that cheap money is here to stay. That will keep the TINA (there is no alternative) trade going.

It’s a perfect setup for IPOs to continue soaring in 2020.

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Yours in Health & Wealth,

Tony Daltorio

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