Stocks rose significantly Wednesday in a broad-based rally led by economically sensitive stocks, even though employment figures came in poorly.
The S&P 500 rose 1.54%, easily outpacing the gain on the tech-heavy Nasdaq, up 0.98%. The 10-Year Treasury yield, which usually rises on risk-on days in the equity market, fell to 0.65%. Investors expect decent inflation at some point post-pandemic based on the Federal Reserve’s stimulative efforts, but with rates likely remaining low for a long time and some level of risk-aversion in the market, some large investors like pension funds and insurance companies are still buying treasuries, Dan Eye, head of asset allocation and equity research at Roof Advisory Group told TheStreet.
Relatively high-growth semiconductor stocks, which comprise a decent portion of the S&P 500, rose considerably, with $345 billion by market cap Nvidia (NVDA) - Get NVIDIA Corporation Report up 3.8%. Nvidia announced a new chip product for gaming. Analysts are raising their price targets, as the chip is not only additive to revenue, but potentially higher gross margin than other Nvidia products, a material positive for earnings.
A negative for pure cyclicals, ADP said the U.S. added just over 400,000 jobs in August, well under economists estimates of just over 1 million. If ADP is accurate — and the Bureau of Labor Statistics will tell all on Friday — the unemployment will have likely fallen at a much slower pace than it already has. Further pressuring the speed of the economic recovery is the fact that Democratic members of Congress are still at odds with each other over provisions in the new fiscal stimulus bill. With interest rates unlikely to fall significantly from here — credit spreads have tightened substantially of late — added jobs and consumer spend hinges somewhat on more fiscal stimulus.
Still, cyclical value stocks lead the day. The only cyclical sector not to rise was oil. Large cap consumer discretionary rose 1.6%, with Lululemon (LULU) - Get lululemon athletica inc. Report, soon to report earnings, up 1.8%.
Some investors have been trickling back into cyclical value stocks, as high-growth tech stocks are trading at sky-high valuations again and value stocks are priced arguably cheaply.
Also, Senator Biden’s lead in the election polls over President Trump has narrowed in the past weeks to roughly 6 percentage points from just over 7. Volatility can be a theme leading into elections, especially if the stronger candidate is not widely seen as pro business. But many point out that without a blue wave in Congress, Biden may not be able t raise corporate and individual taxes as much as he would ideally like to. That’s a positive for all stocks and certainly cyclicals. Also, even if there is a blue wave, Biden may feature heavy fiscal spending, even if he also raises taxes. That spending can at least partially offset any the negative impact of higher corporate taxes.
Here's what Wall Street’s saying:
Mike Loewengart, Head, Investment Strategy, E*Trade on jobs:
"It’s a pretty substantial miss, but still much better than what we saw last month, so there is sustained yet modest improvement. Keep in mind predicting jobs data has been particularly tricky during the pandemic. With a lot riding on employment data, any signs pointing to a positive trajectory could bring our economic recovery closer in line with the markets stellar performance. And with Washington back in action, hopes for an answer to the labor problem are high. What remains to be seen is how that package will play into employment numbers in the weeks ahead.
Dan Eye, Head, Asset Allocation, Equity Research, Fort Pitt Capital Group:
“There’s currently a situation where valuation comes into play here. You can certainly go out there today in a high multiple market and still find great businesses that are trading at 12 to 15 times earnings and they’re just being passed over and at some point an investor needs to say 'are these estimates too rosy' and do some rotation into stocks that haven’t participated as much.”
Team, Global Wealth Management, UBS:
"The US presidential election is just 9 weeks away. Trump’s presidency has led to a significant stimulus program that included tax cuts, reduced expenditures, repatriation of foreign earnings, and deregulation of many industries—all advantages for the dollar versus European and other currencies. Strong equity markets and attractive interest rates have also been factors supporting the greenback. Rolling back the Trump stimulus will create uncertainties with investors, and potential new policies might imply less stimulus. Blue wave: Slightly positive for economic growth as higher taxes and a more stringent regulatory environment are offset by higher fiscal spending. Meanwhile, rates and inflation could rise faster due to stimulus.”
Tony Dwyer, Chief Market Strategist, Canaccord Genuity:
“Although we expect multiple 3-7% pullbacks over the coming months like was the case after the first 50%+ rally by August 2009, we believe the market is in the early stages of a longer-term bull market."
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