3 Reasons To Keep Riding The Bull + Stock Of The Week

The end of the week provided one of the rougher drops for the market in quite some time. The scare mongers in the investment world were fast to parade out a series of headlines calling the health of the bull market into question.

Plain and simple, this is not the time to panic. Here are the 3 key reasons to keep riding the bull market to new heights.

First, consider the many, many times the market has dropped over the past 9 year bull market only to plow higher once again. So a short term decline in stocks is not reason alone to head for the exits.

Second, economic data continues to stream in very positive. That includes a fresh 59.8 read for ISM Manufacturing. While ISM Services surged to 61.6. (Anything above 55 is stellar). The Atlanta Fed’s widely used GDP Now model is estimating a strong +4.1% growth rate for Q3.So no signs of economic slowing here.

Third, yes, interest rates are going up…because inflation is going up. We discussed the likelihood of this happening in my article from a couple weeks ago that included 2 trades to profit from this trend.

Yet still the stock market is much more attractive than an investment in bonds. This is best seen by the still wide spread in the Earnings Yield measure which allows investors to compare the relative value of stocks vs. bonds.

3.2% Treasury 10 Year Yield

5.9% Earnings Yield for S&P 500 stocks

Historically the two get fairly close to par by the end of the bull market. Yet stocks still look nearly 2X better at the moment with new highs the most likely outcome.

However, because of this backdrop there are two groups of stocks that will likely underperform for a while.

  • Income Stocks: As rates go up, it makes the dividend yield by these companies less attractive. So prices often drop to find a better equilibrium.
  • Darling Growth Stocks: I am talking about FANG type stocks that have wildly outperformed leading to a premium valuation. They may see a little more right sizing in price as they did Thursday.
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