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Nasdaq Approaches New Record as Jobs Data Lifts Payroll Stocks

By Dan Caplinger – Jun 5, 2020 at 5:07PM

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Find out what caused a blowout move higher for the markets.

The Nasdaq Composite (^IXIC 2.27%) has led other major benchmarks upward in the recovery from the coronavirus bear market, and today, it became the first of them to move back into all-time-high territory on an intraday basis. The index didn't quite manage to finish the day above its previous record close, but a 2% gain reflected the extreme optimism that investors have about the prospects for strength on the Nasdaq. The Nasdaq 100 index of top Nasdaq stocks did manage to close at record levels, rising 2%.

The immediate reason for the big boost to the market was the May U.S. employment report from the Bureau of Labor Statistics. The numbers for job creation and unemployment were far better than most had feared, and investors in payroll companies Automatic Data Processing (ADP 2.68%) and Paychex (PAYX 2.36%) responded with outsize gains in their share prices.

ADP logo in red, with slogan below.

Image source: Automatic Data Processing.

Why Paychex and ADP soared today

Shares of Automatic Data Processing were higher by 7% on Friday, while Paychex weighed in with an 8% advance. The two companies have fortunes that are closely tied to the labor market, and today's jobs report gave both industry players cause for celebration.

The report on the employment situation in May was surprisingly good. The BLS said that total nonfarm payroll employment rose by 2.5 million jobs in May, stunning economists who'd expected on average a loss of 7.5 million jobs. The big jump in jobs sent the unemployment rate down from 14.7% in April to 13.3% last month.

The biggest gains for May were in the same areas that had suffered the largest losses in March and April. The leisure and hospitality industry saw an increase of 1.2 million jobs, partially offsetting April's 7.5-million-job decline for that sector. In particular, food services and drinking establishments were responsible for creating about half of the monthly gain in total nonfarm employment. Other notable gains came from construction, education and health services, and retail.

ADP and Paychex both provide payroll and related human resources services to businesses. ADP tends to have greater exposure to larger enterprise employers, while Paychex has historically tended to have more penetration among small and mid-sized businesses. Both stocks suffered big declines during late February and March, because investors anticipated that some of their clients might stop using their services entirely, while other customers might seek temporary suspensions or reduce their workforces in a way that would hurt Paychex's and ADP's revenue.

What's next?

Paychex's stock is now only about 10% below where it was before the coronavirus bear market struck, signaling extreme confidence in the resiliency of small and mid-sized businesses. ADP has a little further to go, but it has also recovered most of the ground it lost during the bear market.

Yet even with the good news, the BLS was quick to remind the public that things are far from back to normal. Since February, the number of unemployed people has risen by 15.2 million, and the unemployment rate is still up almost 10 percentage points from where it was before the coronavirus crisis. Nonfarm payrolls are down 13% over the same period. Nevertheless, investors seem to have taken the report as a sign that the economy has already hit bottom and that a recovery is likely from here.

For Paychex and ADP, a lot will depend on whether the U.S. economy can provide more signs of positive outcomes. A setback could send the two payroll stocks lower, but continued good news could push them closer to record highs of their own along with the Nasdaq.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Paychex, Inc. Stock Quote
Paychex, Inc.
PAYX
$114.86 (2.36%) $2.65
Automatic Data Processing, Inc. Stock Quote
Automatic Data Processing, Inc.
ADP
$232.25 (2.68%) $6.06
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
^IXIC
$10,815.43 (2.27%) $239.82

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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