Jobs report shocker is evidence economy is playing catch-up to a 'ray of sunshine' market, Wall Street bull Ed Yardeni suggests
Long-time bull Edward Yardeni believes the historic May jobs surge is a game changer for Wall Street.
According to Yardeni, it debunks the notion there's a disconnect between the significant market rally off the March 23 low and the coronavirus-battered economy.
"The market has been a ray of sunshine — basically investors being convinced that we'll get out of this, and the economy will recover along with earnings. So far, that forecast seems to be working out pretty well, "the Yardeni Research president told CNBC's "Trading Nation" on Friday. "The economy may very well be catching up with the stock market rather than the stock market going off on its own."
May's payroll increase of 2.5 million was the largest on record while the unemployment rate fell to 13.3% from April's 14.7%. The Street consensus forecast had called for payrolls to drop by 8.3 million and for the unemployment rate to rise to 19.5%.
Yardeni, who spent decades on the street running investment strategy for firms including Prudential and Deutsche Bank, credits the government's unprecedented steps to soften the virus' economic blow as the main catalyst for the surprise jump.
"In hindsight, it kind of makes sense because we had the Paycheck Protection Program that was basically implemented in April, encouraging small businesses to keep people on their payrolls," he said.
Yardeni speculates that's exactly what happened: Main Street started bringing back laid off workers once they got the funds.
Barring a second wave of virus cases, he believes the jobs boost helps set the stage for a sharp economic rebound this year before leveling off by winter.
"It is going to be a V-[shape] initially," said Yardeni. "Real GDP could be down 40% to 50% in the second quarter. But the worse it is in the second quarter, the greater the likelihood we'll see something like a 20% increase in the third quarter."
He speculates that'll be enough to drive the S&P 500 to record highs over the next couple months — even exceeding his 2021 year-end target of 3,500. On Friday, the index closed at 3,193, 3% below the all-time high hit on Feb.19.
"Not too long ago we were in the midst of a terrible meltdown in the stock market. But it turned out to be a 33-day bear market lasting from Feb. 19 to March 23," noted Yardeni. "Ever since then, we've had a melt-up that's all related to the Fed coming in with what I call QE4-ever."
"A pretty broad bull market"
His best advice for investors right now is to go with the flow.
"Ever since March 23, we've seen a rebalancing away from bonds and into stocks," he said. "That will continue to be a theme here for the next several months — maybe through the end of the year. So, stocks rather than bonds make sense."
Yardeni's top picks include technology, health care and financials.
"It's going to be a pretty broad bull market here," Yardeni said.