Fears about rising bond yields are way overblown. This has turned investor sentiment quite dark \u2014 and created a textbook contrarian buy signal.\u00a0<\/p>\n
Here are six reasons why you can feel confident betting against the gloom and doom crowd and put money into the market \u2014 especially in economically sensitive cyclical stocks.<\/p>\n
1. Bond yields are up because of tax-loss selling, which will end soon:<\/strong> Portfolio managers avoided stocks and loaded up on bonds in 2022. We know this because the sell-side suggested bond\u00a0exposure was near all-time highs last year and this year as well.\u00a0<\/p>\n Now, portfolio managers are sitting on huge losses in bonds. The iShares 20+ Year Treasury Bond exchange-traded fund <\/p>\n \n \u201c<\/span> Money managers have until the end of October to finish tax-loss selling. \u201d<\/span>\n <\/p>\n<\/p><\/div>\n<\/p><\/div>\n Money managers have until the end of October to finish tax-loss selling. They do not wait until the last day, which means this downward pressure on bond prices will ease sooner than that.<\/p>\n 2. Bonds are down because of renewed concerns about Fed tightening:\u00a0<\/strong> We know this because of how bonds react to economic data. Bonds fell on October 3 after the Bureau of Labor Statistics reported an unexpected jump in August job openings to 9.61 million. The data had investors worried that interest rates will stay higher for longer. Conversely, bonds were strong (yields fell) on October 4 in part on news that Automatic Data Processing <\/p>\n \n \u201c<\/span> It is pretty easy to make the case that inflation is under control. \u201d<\/span>\n <\/p>\n<\/p><\/div>\n<\/p><\/div>\n This hyperfocus on inflation-related data seems misplaced, because it is pretty easy to make the case that inflation is under control. The Consumer Price Index (CPI) and the core CPI are in the low 2% range, excluding rent. Yes, rent inflation matters, but inflation in new leases is winding down, coming in at 3.4% in August. \u201cGrowing multifamily supply keeps new-lease rent growth subdued,\u201d Goldman Sachs economist Jan Hatzuis says.<\/p>\n As for the wage-price spiral investors are worried about, the trendline in job openings relative to the labor supply tells the era of big wage hikes is winding down.\u00a0<\/p>\n Goldman estimates the personal consumption expenditures (PCE), another inflation measure, will continue to fall, hitting 2.4% in December 2024.<\/p>\n In fact, this is arguably an ideal environment for investors, given the favorable mix of strong growth and declining inflation, says market strategist and economist Jim Paulsen.\u00a0\u201cThrough the lens of another time we would be rejoicing,\u201d he says.<\/p>\n 3. This is the market\u2019s \u201cspooky season,\u201d but it always comes to an end:\u00a0<\/strong>The U.S. stock market normally hits annual lows in October. This is partly because institutional investor tax-loss selling has to finish by month-end. But it also has to do with the weather. People traditionally go into harvest and caution mode (raise cash) ahead of the cold season. <\/p>\n 4. Bonds are weak because \u201cbond vigilantes\u201d are sending the government a message:\u00a0<\/strong>Bond investors reacted poorly (selling bonds, driving up yields) this past Monday due to the federal budget deal announced Sunday. It contained no real budget cuts and is temporary. The bond vigilantes were telling Washington, D.C. to get the budget under control, says Ed Yardeni of Yardeni Research.\u00a0<\/p>\n This weight on bond prices is harder to dismiss. One reason is the House of Representatives now has no leader, which increases the odds of a government shutdown on November 17 when the stopgap budget deal expires, says Goldman Sachs economist Alec Phillips.\u00a0<\/p>\n That might not be a bad thing if it pressures politicians to strike a longer-lasting deal, which they typically do. Even Yardeni, who is quite concerned about the impact of the bond vigilantes pushing up yields, still sees 10-year Treasury bond yield settling at around 4.5%-5%.<\/p>\n 5. 10-year bond yields are not that high, historically speaking:<\/strong> The 10-year Treasury bond yield has moved back to the 4%-5% that prevailed from 2003 to 2007, which was a good time to own stocks. For example, the SPDR S&P 500 ETF Trust 6. Investor sentiment is extremely weak \u2014 a bullish sign:<\/strong> The Investors Intelligence bull\/bear ratio recently fell to 1.77. Historically, below 2.0 is a clear buy signal, in the contrarian sense (enough bearishness to be bullish). Meanwhile, the American Association of Individual Investors (AAII) bull\/bear spread jumped to 13 percentage points at the end of September when 27.8% of respondents were bullish vs. 40.9% bearish. This historically wide spread confirms the bull-bear ratio signal. <\/p>\n Buy stocks. Sentiment is extremely weak. But analyst earnings estimate revisions suggest this reporting season will be strong.\u00a0The fourth quarter should be solid, too. The Atlanta Fed GDP now estimates 4.2% growth. Strong economic growth normally means strong earnings growth.<\/p>\n Read: <\/strong>Here\u2019s a roadmap for stocks to own and avoid this earnings season<\/p>\n Also: <\/strong>Let\u2019s debunk the bears\u2019 top arguments against further stock market gains<\/p>\n Also, note that the historic low for the year in stocks is just around the corner. On average, the SPDR S&P 500 ETF bottoms on October 12, notes Jason Goepfert at SentimentTrader.\u00a0<\/p>\n Investor worries about an overly aggressive Fed hurting growth has hit cyclical stocks hard. So they look attractive. To keep things simple, go with ETFs. Consider Fidelity MSCI Consumer Discretionary ETF For stocks, investment researcher Morningstar singles out Devon Energy
\n TLT,<\/span>
\n for example, is down almost 50% from highs in 2020, and more than 40% from the start of 2022, when investors favored bonds over stocks because of U.S. recession fears.\u00a0<\/p>\n
\n ADP,
\n
\n reported weak employment data.<\/p>\n
\n SPY
\n rose about 80% in that period. Indeed, rising rates have not hurt the U>S. economy this time around. \u201cThis raises the possibility that the economy can live with the bond yield back to its old normal level,\u201d Yardeni says.\u00a0<\/p>\nWhat to do now<\/strong><\/h2>\n
\n FDIS,<\/span>
\n Fidelity MSCI Industrials ETF
\n FIDU,<\/span>
\n Fidelity MSCI Materials ETF
\n FMAT
\n and SPDR S&P Oil & Gas Exploration & Production (XOP
\n XOP
\n ).<\/p>\n
\n DVN,
\n
\n which pays a 7.5% yield, and TC Energy
\n TRP,
\n
\n (8.2% yield) in energy, and Park Hotels & Resorts
\n PK,
\n
\n (5.14% yield) in consumer discretionary.<\/p>\nBuy yield<\/strong><\/h2>\n