Stocks surged Friday as the Bureau of Labor Statistics’ jobs report showed a gain in May employment against a must more severe estimated loss. Investors continued to pivot into value stocks, raising questions about where to allocate money next.
All three major U.S. indices soared Friday, with the S&P 500 up 2.5%. The 10-Year Treasury yield rose to 0.89% from 0.81% Thursday. Yields rise when prices fall.
The U.S. economy added 2.5 million jobs in May, putting to shame estimates of more than 8 million job losses. Recently, stocks have risen as monetary and fiscal stimulus has provided enough liquidity to blunt the severity of layoffs and the economic contraction.
Investors have taken solace in the fact that the economy has contracted at a slower rate in the past month than in the end of March and all of April, giving way to the thesis that the economy has bottomed. But this jobs report shows an economy getting back to work as states reopen.
Since March 23, the S&P 500 is up 42% and trading at an expensive valuation, even compared to the low interest rates.
Friday, investors snatched up shares of cyclical value stocks like American Airlines (AAL) - Get American Airlines Group, Inc. Report, which rose more than 11%. Airlines have been hit particularly hard by the crisis and have been much higher volatility than most other groups of stocks.
As the yield curve has expanded while economic demand expectations have brightened, banks stocks have continued rallying, now leading the market’s bounce, with a gain of about 60% since the bear market low in late March. The Invesco KBW Bank ETF (KBWB) - Get Invesco KBW Bank ETF Report rose more than 4% Friday.
But value, especially banks, are still far below their pre-virus levels. The KBWB is still 19% below its all-time-high, compared to the S&P 500 at 6% below its all-time-high.
And with secular growth trends found in growth stocks like some semiconductors, e-commerce, streaming and cloud companies, all of which trade at expensive valuations, investors are wondering what to buy next.
Here’s what Wall Street’s saying:
Chris Zaccarelli, Chief Investment Officer, Independent Advisor Alliance:
"At 13.3%, we are still at a higher rate than any that we hit during the Financial Crisis in 2007-2009, but as long as that continues to move lower, it will show that the re-opening of the economy is proceeding smoothly."
Charles Ripley, Senior Investment Strategist, Allianz Investment Management:
"At the very least, this report affirms that the economy is on the mend and employees are coming back to work after being temporarily unemployed as the unemployment rate declined from 19% to 13.3% with the participation rate moving higher. Ultimately, this report provides additional confirmation for risk asset investors who are betting on a faster recovery of the economy."
Mike Loewengart, Head, Investment Strategy, E*Trade:
“It’s a plot twist many didn’t see coming—a 180 degree turn from expectations of further job losses to a story of modest job gains. After two months of jobs in the red, a pop back into positive territory offers cautious optimism and illustrates the dynamism and resilience of the US economy. As moves to reopen occurred in pockets of the country, leisure, hospitality, and construction sectors benefited from employment increases. While this shows we’re moving in the right direction, the economy is still in very fragile conditions and we’ll need to see consistency in jobs data and other fundamental indicators before we can even attempt to consider normalcy again. Further, while the unemployment rate dipped down, it’s still at historically high levels and could continue to be for some time. On the heels of ECB’s stimulus yesterday, the next question on many people’s minds is how this will play into the Fed’s next move.
Deepak Puri, Chief Investment Officer, Americas, Duetsche Bank Wealth Management:
“Looking ahead, this morning’s report should be certain judged for its overall positive merits, it is important to remember that we are still in the early stages of the recovery. Although this positive print may leave investors with more questions than answers, it will be encouraging to see if the rehiring of workers is sustained. This would certainly validate the fiscal measures enacted, such as the payroll protection program, which now appears to be shortening the typical extended blows inflicted upon labor markets in a recession. Unfortunately, there still remains a great deal of uncertainty ahead for investors; with markets still at the very of additional fiscal stimulus and geopolitical tension rising."
Matt Orton, Portfolio Specialist, Carillon Tower Advisers to TheStreet:
"I do think there’s still more room to run with this cyclical value rotation. This could continue into July. Year-to-date, where a lot of these sectors are, there are still some disparities. There are still some large differentials between the two. When you look at large growth versus value, there’s still almost a 21% gap between growth and value [percentage point difference between year-to-date stock movements]. The growthier parts of the market benefit from the environment we’re going to be in. Semiconductors, software, IT services, if we revert back to where we were 6 months ago, then you’re probably going go back to that same environment. Those handful of stocks are the winners.”