On The Market Reaction To Those Stunning Jobs Numbers and What it Means for Investors

When the May unemployment numbers were released this morning, they showed a stunning increase in non-farm payrolls of 2.5 million as opposed to the decrease of around 8 million economists had expected, with the unemployment rate falling to 13.3% rather than rising to 20% as expected. The Dow reacted exactly as you would expect. Futures were indicating an opening a couple of hundred points higher immediately before the release, then powered on up another 400 or so points immediately after.

Nasdaq futures, however, were another story altogether.

The E-Mini contract there, NQ, did pop a little as the numbers were revealed but then quickly dropped back and was soon trading in negative territory.

NQ did recover and turn positive later, but still showed much lower gains than the Dow.

I am sure that makes no sense whatsoever to a lot of people, but it is a perfect illustration of something I have said here many times: the biggest factor in how a market responds to news is not what that news actually is, it is how the market was positioned before it was released.

Over the last couple of months, as the stock market in general has bounced back, the Nasdaq has outperformed the Dow by a significant margin. So much so, in fact, that the Nasdaq hit an all-time high yesterday, while the Dow, even after a good day itself, was still eleven percent below its high.

That disparity makes sense. The biggest stocks in the Nasdaq are big tech companies, whose products are almost entirely perfectly suited to a socially distant business environment. The Dow Industrial Average, on the other hand, as its name suggests, is loaded with more traditional industries like manufacturing, with some retail and energy stocks thrown in. In other words, the Nasdaq is tilted towards just the kind of stocks that led the recovery, while the Dow has significant exposure to the laggards.

What the jobs data suggests in these significant gains in employment in things like retail services, is that those areas hit the hardest are actually bouncing back much more quickly and stronger than expected. Buying them on that is logical, but there is a bit more to it than that.

First, for many big institutional investors that are required to keep a very high percentage of their funds in stocks, buying Dow type stocks means selling Nasdaq type stocks to generate cash. That explains the relative weakness to some extent, but there is another, position-related dynamic pushing the Dow ever higher.

Back in early April, I pointed out that this was a “FOMO” rally. One of the strongest memories traders and investors have from the 2008/9 recession was that if you didn’t get back in early enough, you started from a major disadvantage. As a result, the bounce got front-loaded but the buying favored the obvious stocks, the tech and so-called “stay at home” stocks that would be less affected by, and in some cases could even benefit from, the shutdown.

For those that didn’t get involved, though, there is a slightly different FOMO dynamic now. They are trying to play catch up, so stocks that are already at or close to pre-crisis highs are not at all appealing. They need to buy the lagging industrial, retail and energy stocks if they are to even get close to the quarter’s performance from others.

So, as crazy as it may look on the surface that one index is soaring while another is falling on the same data set, it makes perfect sense. What we are seeing is a rotation based on risk relevant to the current situation, and it can reasonably be expected to continue for a while.

That means that while there are still significant long-term, and even in some cases existential, risks to a lot of companies in those hard hit sectors, traders and investors who are not averse to some short-term plays should look at those areas for profits in the near term.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Stocks Coronavirus Jobs & Unemployment