The major U.S. stock indices were mixed Friday, but that didn’t tell the full story.
The S&P 500 rose 0.06%, dragged down by the tech-heavy Nasdaq’s loss of 0.87%. The 10-Year Treasury yield, bullishly, rose to 0.56% from 0.55%. Yields rise when prices fall.
Overall, the yield curve between the 2-Year and 10-Year treasuries has compressed significantly since June, as bond investors are tepid on the pace of the economic recovery and they expect the Federal Reserve to increase the size of its asset purchasing program if Treasury yields rise too high. This is both a reflection of weak economic and inflation expectations and a stimulant to the economy.
The U.S. added 1.76 million jobs in July, better than the expectation of roughly 1.5 million. The unemployment rate fell to 10.2% from over 11%. This points to a fast economic recovery. In the morning, risk sentiment was poor, but investors may have come to their senses by day’s end on the somewhat head-turning economic data. Recently, the speed of the recovery had slowed, which could pressure 2021 earnings estimates.
The move out of growth tech stocks, which can power through economic headwinds on several bases, signifies investors are willing to take more risk with cyclical value stocks trading at lower valuations and that are more tethered to inflation and economic growth. The Vanguard S&P 500 Value ETF VOOV rose 1.05%, while its growth counterpart VOOG fell 0.69%. Bank stocks more than 3%, as the yield curve expanded incrementally Friday.
And as investors seek growth tech opportunities away from the recently high-flying FAANG group, Uber UBER wasn’t helping out much. Uber, trading at a not too expensive valuation, posted better-than-expected revenue and a slimmer adjusted EBITDA loss Thursday after the bell, but the stock fell 5.19% Friday. Food delivery surged amid the at-home environment, while question marks around the rides business’ recovery remain. Analyst opinions on whether to move 2021 estimates up or down are fairly diverse.
Here’s what Wall Street's saying:
Ryan Detrick, Chief Investment Strategist, LPL Financial:
"This is yet another sign that the economy continues to come back faster than most think. Yes, future employment data will likely slow due to more COVID-19 restrictions, but for now you have to be quite impressed with how far we've come the last few months. Earnings season has been very impressive so far, now you can couple that with the employment backdrop quickly improving as well. Not a bad combo for investors. Still, let's be realistic, 10% unemployment isn't anything to get overly excited about and we still have a long way to go to get back to February levels of output.”
Chris Zaccarelli, Chief Investment Officer, Independent Advisor Alliance:
"The economy is proving more resilient than many people thought – the jump in payrolls of 1.76mm (and higher than the 1.48mm expected) is showing more strength in the job market, which should be good news for equities and other risk assets.”
Steven Ricchiuto, Chief U.S. Economist, Mizuho Securities:
"Curve Dynamics: The yield curve steepened out to about 70 basis points back in early June shortly after the May payroll report unexpectedly reported a rise in May employment. Since the peak on Monday, June 8th, the 2-year/10-year spread, has been gradually declining back towards the 40 basis point level. As a result, the question being asked by market participants is whether or not the curve is headed back towards to the 20 basis point area that dominated between November and early-March. To answer this question we first need to consider which factors are leading to spread compression and then we need to assess if these consideration have run their course or if they have sustainability on their side. Specifically, the push toward negative rate in overseas markets is clearly a force at work narrowing the spreads along the yield curve. According to our calculations the shard of global share of global debt with negative yields has increased steadily since early-June and now accounts for about 25% of the total market. This phenomena is clearly driving the grab for yield out the curve. The accumulating global deflationary pressures evident in Japan, Europe and even in China are another key consideration leading to domestic spread compression.”
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