U.S. stocks end higher as May jobs report invokes bullish ‘Goldilocks’ scenario

For the week, the Dow gained 0.7%, the S&P 500 rose 0.6% and the Nasdaq advanced 0.5%, FactSet data show.

What’s driving the market?

May’s employment report from the U.S. Labor Department showed that the U.S. created 559,000 jobs, falling short of The Wall Street consensus estimate for a gain of 671,000, based on a poll of economists by Dow Jones and The Wall Street Journal.

Investors breathed “a sigh of relief” after the jobs report today because it was neither so wildly disappointing as the reading for April nor so hot as to make them fear the Federal Reserve will now move more quickly in raising interest rates, according to Bob Doll, the new chief investment officer of Crossmark Global Investments.

“It was a little on the weak side versus consensus, but not horribly so,” Doll, who joined the faith-based investment firm from asset manager Nuveen, said Friday in a phone interview. “The market was fearful after last month’s disappointment.” 

The unemployment rate fell to 5.8% from 6.1%, compared with estimates of a dip to 5.9%. The official rate probably understates the true level of joblessness by 2 to 3 percentage points, economists say, but it is falling steadily.

The May report, however, will likely be interpreted as bullish for the market overall, if it leads the Fed to delay removing its pandemic-era monetary support, including the $120 billion a month asset-purchase plan.

“It’s pretty much a goldilocks scenario, not too soft to have sparked fears of a weak economic recovery, and not too strong to have caused concern about accelerated Fed action,” wrote Mike Loewengart, managing director, investment strategy at E-Trade Financial, in emailed comments.

But in Doll’s view, the market still faces the threat of inflationary pressures.

“I don’t think it’s all transitory, as the Fed suggests,” Doll said. “All you have to do is live life and see all the ‘help wanted’ signs everywhere,” with companies having to entice workers with higher wages to fill jobs, he said. “The zero-to-2% inflation world that we’ve been in for a long time is probably over.”

The May employment report showed that many companies have increased wages to lure workers. Average hourly pay rose 15 cents, or 0.5%, to $30.33 an hour last month. The labor-force participation rate, another closely watched metric, edged lower to 61.6%.

Charlie Ripley, senior investment strategist for Allianz Investment Management, also pointed to wage inflation creeping into the job market, saying that with the labor-force participation rate ticking lower “it appears like employers may need to offer up more incentives to entice workers to fill the record number of job openings that are out there.”

The government data come after April data showed that just 266,000 new jobs were created on a seasonally adjusted basis, significantly missing economists’ forecast that had come in on average at around 1 million.

The nonfarm-payrolls data also follow a reading of private-sector employment from Automatic Data Processing on Thursday, which reported a 978,000 increase in jobs created in May. However, the ADP reports haven’t always aligned with the more closely watched government report.

Meanwhile, the technology-heavy Nasdaq Composite index outperformed the two other major U.S. stock benchmarks Friday.

“Rates are lower and tech is leading,” Phil Camporeale, portfolio manager for JPMorgan Chase & Co.’s Global Allocation fund, said Friday in a phone interview. Today’s employment data have resulted in “a little bit of respite” from the rotation away from growth stocks into value in recent months, as the economy continues to rebound in the reopening from pandemic-induced lockdowns. 

JPM’s Global Allocation fund has been adding to its position in value and pro-cyclical stocks this year without abandoning its exposure to growth equities, according to Camporeale. He said he is generally less worried about the Fed tapering its asset purchases — a move that is “just less easing” — than potential interest rate hikes should inflation become a bigger concern for the Fed.

Cleveland Fed President Loretta Mester during an interview on CNBC said that the Fed wants to be ‘very deliberately patient’ on policy decisions. She also said that wage gains aren’t yet feeding into underlying inflation.

Check out: Why markets have been stuck, and what might get them moving again

On Friday, President Joe Biden, during a news conference to discuss the employment figures, touted the “historic progress” that has been made since he took office in January, pointing to roughly 2 million jobs recovered.

“It’s going to be harder to get back to a pre-crisis level of participation,” Erik Knutzen, the CIO of multi-asset class at Neuberger Berman Group, said Friday in a phone interview. While that may lead to wage inflation pressures down the road, investors now view the latest employment data as providing latitude to the Fed to remain “very dovish.”

“Bond yields are trading like inflation is not going to be a problem,” said Knutzen. The yield on the 10-year Treasury note edged lower Friday to about 1.55% in afternoon trading.

With respect to equities, Knutzen said he has a roughly “neutral” weighting biased toward “reopening stocks” in the U.S., including companies in areas such as consumer services, lodging and restaurants. He said he also favors semiconductor companies and the FTSE index for its global exposure to cyclical areas such as materials, energy and financials. 

See: A lot is riding on May jobs report after recent U.S. hiring lull

Meanwhile, a report on Friday showed that U.S. factory orders slipped in April 0.6%,  the Commerce Department said Friday. Economists surveyed by the Wall Street Journal expected a 0.2% decline, and the drop snapped an eleven-month string of consecutive increases going back to May of last year.

Investors were also keeping one eye on discussions around an infrastructure spending proposal, after President Biden signaled that his administration would be willing to make concessions on corporate taxes to forge a deal.

Which companies are in focus?

• Bill Ackman’s special-purpose acquisition company, Pershing Square Tontine Holdings, PSTH is nearing a transaction with Universal Music Group that would value the world’s largest music business at about $40 billion. Pershing Square Tontine’s shares fell 11.9% in afternoon trading
• Meme stock AMC Entertainment Holdings Inc. AMC revealed Thursday afternoon that it will ask shareholders for the authority to issue up to 25 million shares, after selling stock into a dramatic upswell of its share price in recent days. Shares of AMC dropped 6.7%.
• Shares of Apple Inc. AAPL rose 1.9% ahead of the technology giant’s Worldwide Developers Conference (WWDC) next week.
• Shares of ODP Corp. ODP, rallied 11.2%, after the office supplies retailer received an unsolicited $1.0 billion bid from Staples parent USR Parent Inc. to buy ODP’s consumer business, which includes the Office Depot and OfficeMax retail stores business.
• Shares of Regeneron Pharmaceuticals Inc. REGN were up 1.2% after the company said U.S. regulators had authorized a lower-dose and subcutaneous version of its COVID-19 antibody treatment.
• The COVID-19 vaccine developed jointly by Pfizer PFE and BioNTech BNTX has been approved for 12 to 15-year-olds in the U.K, the Medicines and Healthcare products Regulatory Agency (MHRA) said on Friday. Shares of Pfizer rose 0.5% while BioNTech shares jumped 8.4%.

How are other assets faring?

• The yield on the 10-year U.S. Treasury note TMUBMUSD10Y, was at 1.559%, compared with 1.628% on Thursday.
• The ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six major rivals, was down 0.4%.
• Oil futures
  CL00,
  +0.86%
  ended higher, with West Texas Intermediate crude for July delivery rising 81 cents, or 1.2%, to settle at $69.62 a barrel. Gold futures
  GC00,
  +1.11%
  for August delivery climbed by $18.70, or 1%, to settle at $1,892 an ounce.
• In European equities trading, the pan-Continental Stoxx Europe 600 SXXP, +0.20% rose 0.4% Friday for a record close bringing gains for the week to 0.8%. London’s FTSE 100 UKX edged up 0.1% for a 0.7% weekly gain.
• In Asia, the Shanghai Composite SHCOMP added 0.2%, while the Hang Seng Index HSI slipped by 0.2%; Japan’s Nikkei 225 NIK lost 0.4%.