Markets surge on strong jobs data
As recently as Thursday, North American markets were looking tired. There were signs that they had risen from their March ashes too quickly and many analysts argued equities had become so overvalued that they were due for a pullback.
On Friday, investors all but discarded that thesis, driving the Dow Jones Industrial Average up 829 points and the S& P/ TSX Composite Index up 326 points on the back of employment data that suggested the worst of the pandemic- induced economic crisis may be over.
The U. S. economy added 2.5 million jobs last month and widely beat the expectations of economists who predicted that it would instead lose eight million. A similar turnaround occurred in Canada, which reported gaining 289,000 new jobs in May, when economists were expecting a loss of 500,000.
The numbers were almost too good to be true for CFRA Research chief investment strategist Sam Stovall.
“When I heard jobs actually rose in May, my first impression was the ( U. S.) government must have done something wrong,” Stovall said.
The explanation of what happened next is simple for Stovall. Short sellers who were of the opinion that the market was too frothy, especially in the sectors that were the poorest performers during the market crash, were squeezed out. And those maligned sectors, which had already hinted that they were ready to push higher, exploded.
Royal Caribbean Cruises Ltd. closed up by 20 per cent while dozens of Canadian small- and mid- cap energy names surged more than 15 per cent. Once- sluggish REITS such as Riocan Real Estate Investment Trust and Allied Properties Real Estate Investment Trust each gained more than five per cent while both the Canadian and U. S. banks continued their hot streaks, albeit to a lesser degree.
Sprinkle in a bit of FOMO from those who weren’t already invested in these sectors and Friday’s market performance was understandable, he said.
“Investors are feeling more optimistic and confident that share prices can continue to rise rather than being set up for a bull trap,” Stovall said.
BMO Capital Markets chief investment strategist Brian Belski never lost faith in the markets. He remained bullish for the year even as stocks bottomed in March. Friday’s employment data coupled with the rally should once and for all put to bed any notions of another Great Depression, he said.
“The prognostications of the second great depression and a brand new society was all bunk,” Belski said. “If the U. S. is adding the jobs and all of a sudden the more conservative and scaredof- their- own- shadow Canadian companies are adding jobs, enough is enough on this.”
He also expects that the negative calls being made on the Canadian banks will come to an end. Since the downturn, technology stocks such as Shopify Inc., Zoom Video Communications Inc. and the FAANG stocks led the market higher. Some of those names, like Zoom, have more cyclical stories, Belski argues, and while he’s not suggesting investors give up on Shopify, which closed in the red on Friday, or Apple Inc., their focus should be on the more beaten-down stocks, particularly the banks.
Unlike the airlines and cruise lines, the Canadian banks are not going to go through a massive secular change, Belski said. That’s already happened in the past 10 years. Meanwhile, Belski argues that the increase in loan- loss reserves to more than $ 10 billion at the Big Six is a good thing. Historically, a massive spike in this metric is followed, on average, by a 25 per cent return over the next 12 months.
“They’re missing the forest through the trees on the banks,” said Belski. “The yield trade, the equity income trade, the big bank trade in Canada is going to be the place to be.”