In my many years of writing about stocks and investing in equities myself, I’ve learned some important principles that have generally served me very well. When it comes to stocks to sell and sectors to avoid, there are some important principles to consider. Indeed, one of the most pertinent involves staying away from those sectors and stocks that government policies are badly hurting. Another important rule relates to avoiding sectors and stocks that are flying high because of ideas being embraced by the majority of Wall Street, that could be based on flawed assumptions.
Right now, there are specific sectors that fit this bill. The crypto, housing, and staples spaces are all sectors to avoid in July. Here’s some information about why those are some of the worst sectors to invest in right now.
Crypto
Washington has taken extensive, crippling actions against the crypto sector over the last year. Most notably, regulators have lashed out against two of the largest crypto exchanges. This comes as American banks have been actively discouraged from aiding the sector.
Thus, by making it much more difficult for exchanges to operate and impinging on the ability of cryptos to carry on operating, these actions should put tremendous downward pressure on the value of cryptos over the longer term.
Turning to the specific actions that Washington has taken against the sector, the SEC sued two of the largest crypto exchanges, Binance and Coinbase (NASDAQ:COIN), earlier this year. Among the allegations leveled by the agency were charges that both exchanges have been selling “unregistered securities.” I believe that these charges will eventually hurt the entire crypto sector. That’s because this will force these exchanges to sharply curtail their businesses. Thus, the ability of retail investors to buy cryptos will be greatly limited.
In my opinion, regulators are likely to look askance at banks that get involved with the crypto sector. Consequently, crypto projects will probably have difficulty getting funded by U.S. banks going forward. As such, this is a sector with limited growth prospects I think is worth avoiding over the longer-term.
Staples Stocks
Consumer staples stocks are widely viewed as largely resilient to recessions. Accordingly, investors who are worried about an economic downturn have bid many staples stocks to ridiculously high valuations.
For example, the trailing price-earnings ratio of Pepsi (NYSE:PEP) is 38.6-times, while the equivalent ratio is 19.7-times for rival Clorox (NYSE:CLX). Many stocks in this group have valuations that are significantly above the S&P 500’s average level of 16.3-times. Yet, few of these companies are likely to ever achieve tremendous growth or develop a product that catches fire. Consequently, these names and many of their staples peers are tremendously overvalued at this point.
Moreover, given the tremendous strength of the labor market, current GDP growth, and continued real gains in the consumption, a recession is highly unlikely. As investors realize that a recession is not likely to emerge in 2023 or 2024 and internalize that concept, they will probably sell staples stocks and buy names that are much more well-positioned to benefit from strong economic growth going forward. Consequently, the valuation of these staples stocks is likely to sink on a relative basis.
Housing
In recent weeks, housing stocks have surged. One such prime example of this is the Vanguard Real Estate ETF (NYSEARCA:VNQ). This ETF has surged 7% from May 24 to July 6, and homebuilder Lennar (NYSE:LEN) jumped over 11% from June 1 to July 7. That’s a decent near-term move.
However, many investors may have gotten “over their skis” when it comes to housing stocks in recent weeks. That’s because, although the sector’s supply-demand trends remain broadly positive, the Federal Reserve is likely to raise interest rates at least one or two more times this year. Indeed, at their last meeting, most of the central bank’s officials stated that they are likely to support increasing rates further going forward. Since housing is generally very sensitive to interest rates, the sector could easily perform worse than expected if mortgage rates rise further. This would put obvious downward pressure on housing stocks.
Additionally, the work-from-home trend shows signs of slowing. That trend, in turn, could greatly slow the migration of Americans from cities to suburbs and exurbs and from America’s North to its Sunbelt, putting further downward pressure on the housing sector and housing stocks.
On the date of publication, Larry Ramer held a short position in COIN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
