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Why stock market investors should be bullish despite recent volatility, according to a strategist

You wouldn't guess it by the direction of stocks in the third quarter, but there are a few emerging reasons to begin nibbling at the beat-up market, according to one pro.

"Oversold is one [reason to buy stocks]," Matt Miskin, co-chief investment strategist at John Hancock Investment Management, said on Yahoo Finance Live (video above). "Sentiment is washed out, meaning that everyone is pretty bearish. Even the strategists out there that have been more bullish have kind of turned and become more bearish."

"So if we get any good news like the Fed pivots a little bit, if Treasury yields just stop going up, if oil prices came down ... those would all be things that could make a short-term bounce in global equities," Miskin added.

Fighting bulls are seen on a ranch in Portezuelo, Spain, on April 24, 2020. REUTERS/Juan Medina
Fighting bulls are seen on a ranch in Portezuelo, Spain, on April 24, 2020. REUTERS/Juan Medina

It's understandable why everyone's so bearish: A number of factors converged in the last quarter to damage market sentiment.

For one, the Federal Reserve continued its mission to stomp out inflation by aggressively hiking interest rates. The effects have rippled across an array of asset markets, from the surging U.S. dollar to rising mortgage rates that are nearing 7%.

"What they're doing today is actually going to show up in terms of tightening in the economy next year," Miskin explained. "And so you can't just stop inflation in its tracks. If you do want to, which that's what they want to do, the best way to do it is cause a global recession. But the thing is, you're bringing in all these other risks into the picture. And by the time the data shows up, it's actually too late."

Those crosscurrents are beginning to show up in economic data and corporate earnings. Last Thursday, the Bureau of Economic Analysis reported that U.S. GDP declined in the first half of the year. And earlier in September, concerns about slowing growth materialized when FedEx (FDX) shocked the market by slashing its full-year guidance.

Retailers are also showing signs of battling an economic slowdown, with North Face owner V.F. Corp issuing a full-year profit warning and Nike warning on sales and profits last week. And reports have surfaced that Apple plans to cut iPhone production due to growth fears, prompting a headline-grabbing downgrade on the tech giant's stock by Bank of America Analyst Wamsi Mohan.

The broader indices appropriately reflect the gloom. Year to date, the Dow Jones Industrial Average (^DJI), S&P 500 (^GSPC), and Nasdaq Composite (^IXIC) are down 18%, 22%, and 30%, respectively.

The current pullback in the S&P 500 is now the longest from peak to trough since the March 2009 low at 269 days and counting, according to research from Compound Capital Advisors.

At a decline of 25.2%, this year’s correction has been worse than the average pullback of 7.6% going back to 2009.

Other strategists expect that selling pressure to continue as risk factors mount.

"Rising interest rates, slowing growth, and increased unemployment will drive households to continue selling stocks," Goldman Sachs strategist David Kostin warned in a new note. "Corporates will be the largest source of equity demand due to strong buybacks and weak issuance."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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