Market Flipped Positive After Poor Jobless Claims: What Wall Street's Saying Thursday

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After beginning the day down substantially, stocks were mixed Thursday, with overall market sentiment still fairly positive.

Here’s how that breaks down.

The S&P 500 fell 0.15% because many large cap tech stocks like FAANGS were down more than 1%. The 10-Year Treasury yield, after starting the day down, ended the day flat at 0.73%. Yields rise when prices fall and vice versa.

Cyclical stocks, while not exhibiting a convincing rally, did rise on a day in which jobless claims missed estimates baldy. Large cap consumer discretionary stocks were up a bit less than 1%. Manufacturing stocks rose a few tenths of a percentage point.

Even bank stocks, recently pressured on a compressing yield curve (which dents profitability) and low loan demand, rose more than 1%. The KBW Bank ETF  (KBWB) - Get Report is down almost 2.5% in the past 5 days and investors may be buying a dip in these stocks, which Navid Abghari, senior portfolio manager at Angel Oak Capital Advisors told TheStreet are “mispriced” relative to the broader market.

The average earnings multiple on the S&P 500 is around 25 times, while many bank stocks trade at roughly 11 or 12 times. That’s where they have traded in the past several years, which sported higher interest rates. Now, with rates lower, and valuations getting a boost, banks are trading at a larger discount to the broader market that usual. The tug-and-pull between the lower interest rates’ implications for bank earnings and the present value of those earnings is on. Abghri believes the valuations in other sectors indicate the yield curve will eventually expand and so will bank stocks will rise.

Jobless claims for the past week came in at 898,000, a far higher number than last week’s 845,000 and higher than economists estimates of roughly 830,000. 

Recently, the number of weekly jobless claims has been declining at a slowing pace week-over-week, causing investors concern over the pace of the economic recover. But the data out Thursday, which featured a considerable increase in claims, is worrisome, especially as coronavirus vaccines are delayed, as is fiscal stimulus. Treasury Secretary Steve Mnuchin said fiscal stimulus isn’t likely until after the election. It is possible Thursday’s claims reflect an already ailing economic recovery resulting from the lack of stimulus.

One factor, though, keeping investors in a risk-on mood Thursday, is that recently, while jobless claims numbers have disappointed, the number of jobs added has kept the labor market growing. Some economists believe economic momentum has been strong enough to partially offset the elevated jobless claims.

The question now is whether corporate earnings will be largely revised downward or up.

Here’s what Wall Street’s Saying:

Mike Loewengart, Managing Director, Investment Strategy, E*Trade:

"The jobless claims report is a stark reminder that we are far from out of the woods—albeit heading toward recovery. In the meantime stimulus is critical and we’re still on shaky ground there. Without that boost from the government, jobs numbers will likely continue to flag. Out of the gate, earnings results are coming in better than last quarter, but the economy is largely in a very different place than it was at the end of 2019. And even though we’re in early stages of earnings season, the market more or less has been brushing off pretty solid results."

Steven Ricchiuto, Chief U.S. Economist, Mizuho Securities:

"Our net take on the plethora of data released at 8:30 this morning is that the economy is locked on a sustainable recovery trajectory and that a weaker dollar has helped immunize the domestic economy from global deflation pressures. The unexpected increas in weekly claims was fully offset by the decline in continuing claims. Weekly claims for jobless benefits increased to 898k from 840k in the October 10th week, even as California’s numbers remain frozen as the state adjusts its computer systems to better weed out possible fraudulent filing. In contrast, continuing claims dipped to 10,018k in the October 3 week from 11,183k in the prior report. The net read on the labor markets from this data, and the labor read from the Empire State and Philly Fed regional PMI’s, suggests a continued firming in both employment and hours worked. These trends, and the increased new orders, suggest that a high degree of confidence in the sustainability of the recovery remains heading into the fourth quarter."

Mark Haefele, Chief Investment Officer, Global Wealth Management, UBS:

"It has been another challenging week for income investors, with German. Bund yields falling to the lowest levels since mid-March amid rising virus concerns. The Italian government, which has Europe's second-largest debt burden relative to GDP, issued its first benchmark three-year bond with a zero coupon. Even the equity market has become harder for income seekers. Asia is having the worst year for stock dividends in over a decade, according to Bloomberg, with 28% of APAC companies eliminating or reducing dividends this year. In Europe, 50% of companies have done so, along with 13% in the US. Despite the headwinds to finding income from central bank stimulus and dividend cuts, we still see options for yield hunters: Not all dividends are vulnerable: Our recommended dividend investing strategy is based on a combination of dividend sustainability, above-average dividend growth and a relatively attractive yield level. This we call high-quality dividends. We see dividend opportunities in various regions, including Switzerland and Asia. Swiss dividend-paying equities are attractive; the average yield, at around 3%, is significantly higher than that of Swiss franc corporate and government bonds. In Asia, we recommend exposure to quality growth and cyclical stocks, which are typically industry leaders with proven long-term track records of dividend growth and offer above-benchmark average forward dividend yields.” 

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