Investors Loved ADP Jobs Data: What Wall Street's Saying

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Stocks rose Wednesday after the ADP jobs report showed convincing strength in the labor market.

The S&P 500 rose 0.83%, outpacing the gain on the tech-heavy Nasdaq, which rose 0.74%. Still, FAANG stocks largely were 1.85%, while it was semiconductor stocks faltering. Cyclical stocks had a strong day. The 10-Year Treasury yield rose to 0.68% from 0.65% and investors were in a good mood. Yields rise when prices fall. Inflation expectations have recently ticked slightly higher, a positive signal for cyclical stocks.

The ADP jobs report showed a September net jobs add in the U.S. of 749,000, easily clearing estimates of 600,000. This comes after a rough jobless claims report, with some noting that this points to a likely strong Bureau of Labor Statistics report Friday. Economic data have been mixed of late, but the prevailing narrative on Wall Street is that the V-shaped economic and earnings recovery is intact. Stocks on the S&P 500 are averaging a 21 times multiple on earnings for the next 12 months and while big tech valuations pull that number higher, valuations in value stocks are still near reasonable territory by historical correlations of multiples to interest rates, even though some sectors are trading somewhat cheaply to some on The Street.

This leaves the door wide open for stocks to move higher on good economic news and earnings momentum. Consumer discretionary, banks and material stocks rose more than 1%. Oil and industrials fell a bit as risk sentiment did fade some throughout the day. Stocks were up more sharply by midday. Senior Market Strategist at TD Ameritrade Shawn Cruz, in a conversation with TheStreet, did highlight the importance of Friday’s more telling jobs report from the BLS.

In tech, semiconductors lagged, highlighting that the Nasdaq’s gain was indeed attributable to FAANG stocks, which is not music to the ears of value bulls.

The iShares PHLX Semiconductor  (SOXX) - Get Report lagged growth stocks, with the industry up 0.17%. Micron  (MU) - Get Report wiped the floor clean on quarterly revenue earnings Tuesday, but its current quarter revenue guidance of $5.2 billion was light compared to analysts' hopes for $5.27 billion.

Earnings per share was guided at 47 cents against estimates of 66 cents. Analyst not that Huawei revenue — 10% of Micron’s total — and slowing enterprise spend in cyclical customers like energy and hospitality ones are weighing on the near-term outlook. Still, management noted 5G and cloud growth drivers are intact and should see results through for the next year-plus in the larger picture.

Micron fell 7.39% to $46.94 a share. The other chip makers derive some, but minimal, revenue from Huawei. Chip stocks levered to 5G and cloud spend rose, but while the work-from-home environment is causing larger business shifts to cloud from traditional data storage, cyclical headwinds are getting in the way of the strongest potential adoption of certain services and product purchases.

Here’s what Wall Street’s saying:

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

“The pace of economic recovery is certainly key to future growth, and with private sector employment coming in better than expected this morning—the largest gain in 3 months—this could point to signs of strength in the labor market."

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

"Many factors can explain why the equity markets transited from an anticipated decline in prices at the open to a solid performance as the day progressed. First, on every commentators list of primary drivers is the renewed speculation of a phase IV stimulus program. The push by moderate Democrats in the House and the Administration’s desire to boost the economy heading into the election has keep discussions alive much longer than most Capitol Hill watchers have anticipated. Second, the failure of either presidential candidate to deliver much sought after knockout punch also increases the risk of divided government continuing into the 2021-2023 period. Divided government limits the ability of either part to pass ideologically drive legislation. Essentially, it increases the likelihood of grid lock which has tended to be good for markets. Additionally, the continued string of stronger than expected data suggest that the summer dip was just that a dip, not a reversal in the underlying economic momentum.”

Scott Knapp, Chief Market Strategist, CUNA Mutual Group:

"Any new fiscal stimulus that support businesses, if not targeted, could merely postpone the inevitable demise of firms with no hope for ongoing viability in the post-COVID economy. Identifying which industries and firms will live into perpetuity and which will succumb to creative destruction typically requires judgement calls within the free market, but policymakers are already making such judgements as they implement stimulus programs designed to replace growth that was lost to the COVID crisis."

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