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: 6 reasons this is a fresh multiyear bull market and 6 stocks in the surprising sector you should favor

Nothing like a little October turbulence to help the market’s weak hands get in touch with their inner bears.

But don’t let their negativity rub off on you. We’re still near the beginning of what will be a multiyear bull market. Here are six reasons to buy stocks now, and six names to consider in one of the best sectors to own at the moment.

1. Sentiment has gotten bearish enough

I regularly track investor sentiment in my stock letter (details and link in bio below) to make contrarian “calls” on the market. While most of your money should be in long-term holdings, timing entries when most people are bearish gives you an edge. That is the case now. Sentiment is not extremely negative, but it fell enough this week to trigger a buy signal in my system.

It’s also worth pointing out that major media figures turned pretty negative this week, another good contrarian signal. (I won’t name names.) And the fact that their negativity is a bullish signal in my book doesn’t mean I think they are dense. It’s just that high-profile media commentators are consensus sponges. It’s an occupational hazard – which we can use to our advantage as investors.

Pick your favorite popular financial media talking heads, then do the opposite whenever they turn consistently negative — or positive.

2. Seasonality is in our favor

The worst month for stocks is October, and the weakest days are Oct. 10 and Oct. 11. Then this bleak month is followed by the seasonally strong January-May phase when the market is bolstered by new money coming in. In between, November and December can be strong as stocks rebound from October weakness and the end of the mutual-fund tax-loss selling season. That’s finished at the end of October.

3. COVID is rolling over

It’s no secret that case counts and hospitalizations are down sharply. Last year, the cold weather did not usher in a winter COVID flu season. So, it’s not too crazy to expect the same thing this year, especially given all the people who have been vaccinated or infected. Reopening will help boost the economy.

4. A correction may have already happened

Since the summer, the market has experienced rolling corrections in various sectors. The Russell 2000
RUT,
+0.10%

was down over 10% in August, the definition of a correction. Cyclicals, retail, tech and so forth have all been hit. As of early October, 90% or more of S&P 500
SPX,
+0.16%

and Nasdaq
COMP,
+0.18%

stocks had fallen at least 10% from 2021 highs, notes Liz Ann Sonders, chief investment strategist at Charles Schwab
SCHW,
+1.49%
.

In other words, while everyone was looking for a correction, it may have already happened. The market has a funny way of tricking most people most of the time, this way.

5. There’s been strong household formation

Millennials are finally giving up on the parents’ basement – if there was ever any truth to that cliché.

What is true: They’re entering the prime age for marriage and family. Plus, the economy is booming so they feel confident enough to make the plunge into homeownership.

The upshot: Household formation is now at about two million per year, more than double the rate for the past five years. Home buyers have to purchase a lot of stuff to fill up those new houses. That’s a built-in economy booster.

6. The consumer is scared, locked and loaded

There are at least a half-dozen natural sources of stimulus in the economy ready to drive growth whether the Fed tapers or not, points out Jim Paulsen, an economist and strategist at Leuthold Group. One is that household formation, mentioned above. Another is the low level of inventories at companies – which have to restock big time. But to me, the big one is the consumer, simply because consumer spending is the big driver of our economy.

The bottom line: Consumer are scared. But they have a ton of buying power to tap when their anxieties ease — perhaps as COVID continues to roll over.

Now a little more detail. August consumer sentiment was at the lowest level since the pandemic began, as measured by the University of Michigan index of consumer sentiment. It nudged up in September, but it is still low.

At the same time, consumers have a tremendous amount of buying power. Personal savings are at about 12% of GDP. That’s twice the longer-term average of around 6%-7%, notes Paulsen. Net worth compared to income is at record highs.

Don’t make the mistake of thinking that’s just the rich getting richer because of the stock market. Homes are up a lot too, and most people own homes. The ratio of household debt to personal income is the lowest since 1985.

“Consumers are scared and loaded with untapped buying power,” says Paulsen. “This pessimistic mindset combined with the excess buying power has historically produced solid market gains with infrequent declines,” he says. “This ratio portrays a bull market that is still in its infancy.”

Stocks to buy

Since the consumer is such a big part of this dynamic, I say go with retail stocks. They’ve been underperforming, which also makes them look attractive.

Morningstar cites Bath & Body Works
BBWI,
-0.50%

as a retailer with a moat and trading at a discount. The body care and home fragrance retailer has a four-star rating because its stock is trading so far below Morningstar’s “fair value” estimate of $79 for the name.

As for the moat, analyst Jaime Katz cites the company’s strong brand, its leadership position in its space, and the 30% average return on invested capital, well above its 8% weighted average cost of capital.

Eric Marshall, a portfolio manager at the Hodges Small Cap fund
HDPSX,
+1.83%
,
likes the apparel retailer American Eagle Outfitters
AEO,
-0.12%
,
which is down over 35% from highs this year. The company posted record revenue of $1.19 billion in the second quarter, up 35% year over year.

The core growth driver is its popular Aerie brand. Marshall thinks the company will earn over $2 a share this year, which makes American Eagle stock a bargain at around 13 times forward earnings.

Marshall is worth listening to because he has a hot hand. His Hodges small-cap fund is up 31% this year, beating its small blend category and Russell 2000 index benchmark by 12 to 18 percentage points, according to Morningstar.

Marshall also likes Academy Sports and Outdoors
ASO,
-0.26%
,
which sells sports and outdoor recreation goods. The pandemic was a windfall for this company because of the popularity of outdoor activities. Strong pandemic sales helped the company chip away at its high debt levels. Analysts are worried the pandemic-inspired popularity of outdoor activities will wane, but Marshall thinks the outdoor lifestyle will stay in vogue.

While many retail sector investors are awed by the power of Amazon.com
AMZN,
+0.54%

and Walmart
WMT,
+0.02%
,
Motley Fool retail sector analyst Asit Sharma favors niche chains that have mastered the “direct to consumer” sales model. They offer great stores and solid products, but also the mix of delivery options that shoppers want – including in-store pickup of items bought online.

“The retail sector gets a perennial bad rap because everyone is focused on yesterday’s story, that Amazon and Walmart are taking out all physical stores,” says Sharma. But that’s not the case. Many retailers provide a mix of excellent in-store experiences and unique products that the two retail giants can’t really offer.

Here, Sharma cites Lululemon Athletica
LULU,
-0.19%
.
“We love the fact that the company spends on its own research and development innovation on the fabric side.” Stores give consumers a chance to check out the custom fabrics in person.

Sharma also favors Yeti Holdings
YETI,
-0.70%
,
which sells coolers, “drinkware” and outdoor equipment. For a larger cap name, consider the popular retail giant Target
TGT,
-0.32%

for its “everything under one roof” approach to retail.

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned AMZN. Brush has suggested AEO, AMZN, WMT and TGT in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.

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