Stocks had a fantastic August--the best since 1984--with the Dow, the S&P 500 and the NASDAQ up 7.6%, 7% and 9.6%, respectively. Stocks have now erased all Covid-19 losses.
But beneath the surface, the rally worryingly lacks breadth. The five biggest stocks Alphabet, Apple, Amazon, Facebook and Microsoft make up 22% of the S&P 500. They were up over 35% through July. Take away the FAAAM stocks and the market is flat. At current valuations, FAAAM a 10% drop in FAAAM would require a 90% increase in the rest of the market to keep the S&P 500 level.
Looking ahead, history suggests a more muted September, usually the worst month of the year for stocks. Since 1950 stocks have been down 41 of 71 times, losing on average 0.6%.
The Fed has already stressed it will keep rates low for the foreseeable future. That means the biggest drivers for stocks in the near term will be a Covid-19 vaccine (there will likely be one, but will it be safe or effective?) and politics.
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