Stocks rose considerably Wednesday, as the ADP jobs report showed losses in May, but a trend in the right direction. Some on Wall Street are still cautioning against what seems to be ever-growing valuations.
All three major U.S. indices rose, with the S&P 500 up 1.3%. The 10-Year Treasury yield rose to 0.76%, a level not seen since mid-April. Yields rise when prices fall.
The ADP jobs report showed 2.7 million job losses in May, better than the expected 8.7 million in job losses and a considerably improvement over April’s job loss of 20 million. This validates the investor thesis, seen in several other economic data points as well, that the economic recession has bottomed and may soon move towards a growing environment.
Leading the market rally were cyclical value stocks, a pivot investors have made of late, as they grow more bullish on a fast economic recovery.
The Invesco KBW Bank ETF (KBWB) - Get Invesco KBW Bank ETF Report rose more than 5%. Not only have loan volumes surged, but the yield curve has also expanded, a huge input to bank profitability. Airlines also rose substantially, with United Airlines (UAL) - Get United Airlines Holdings, Inc. Report up 12.5%.
Airlines have been teetering on the brink of bankruptcy, so expectations of a cyclical upturn can easily see these stocks gain massively. But the U.S. also said Wednesday it wants to disallow Chinese airlines from flying to and from the U.S., which could potentially aid the market share of U.S. airlines.
Valuations are slowly moving from full to stretched. The equity risk premium on the S&P 500, the index’s forward one-year earnings yield minus the interest rate on the 10-Year Treasury Bond, is now at 3.4%, as investors bid up prices and demand less excess return on stocks as they see less risk to earnings. In a healthy environment, the risk premium averages around 3.5%, a threshold the market has now crossed, making stocks vulnerable to risks.
Here’s what Wall Street’s Saying:
Mike Loewengart, Head, Investment Strategy, E*Trade:
"Make no mistake, May data is still horrendously low but there are two encouraging signs in this morning’s ADP read—April’s upward revision and the fact that May’s number was substantially better than analyst expectations. In the context of the current environment, the status of private sector employment is better than many anticipated. In fact, with many businesses across the country reopening—labor watchers may optimistically be thinking that the worst is behind us. Looking at the ADP trendline, this is one fundamental indicator with a seemingly v-shaped recovery—there still remains a lot of question marks though. The world of work has structurally changed and it’s unclear if recent job losses are permanent or if there is hope of them returning. Further, as the hunt for a vaccine continues, this could have downstream effects on the economy and job market should a second wave of infections arise.”
Seemah Shah, Chief Strategist, Principal Global Investors:
"The severe dislocation between strong markets and weak fundamentals has returned. Markets are once again vulnerable to a negative swing in sentiment — certainly a second wave of infection that results in renewed lockdowns could bring this new bull market to an abrupt end. Verdict: Continued headwind.”
Rebecca Felton, Senior Market Strategist, Riverfront Investments:
"Today, the S&P 500 has recovered roughly 2/3 of the losses incurred since February 19th, similar to mid-2010. Economic data and earnings have yet to turn. We expect that they will turn, but over the next year the turnaround will need to be meaningful to justify current and ultimately higher stock price levels. Our portfolios are positioned to reflect our belief that we will see such an improvement.”