The TSX today is starting to shift. Already, shares have climbed past the all-time high. And yet, it’s not just in Canada. Around the world major indexes are seeing a climb past all-time highs. However, it’s not all good news for investors.
In fact, there are sectors that tend to start falling when the market recovers. So, let’s get into some stocks you may want to start avoiding, for now at least, and one that should start climbing back once more.
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Gold stocks
During downturns, gold and precious metal assets are often viewed as safe havens during times of economic uncertainty. When the market begins to recover and confidence returns, the demand for precious metals typically decreases, leading to lower prices. Gold, in particular, is bought as a hedge against inflation and currency devaluation.
Instead, investors want to withdraw their cash during a recovery and put it towards higher-earning growth stocks. Perhaps now is the time to avoid gold stocks such as Barrick Gold (TSX:ABX). Barrick Gold is one of the largest gold mining companies in the world, with operations spanning several countries. Because of this, it’s very exposed.
As a major gold producer, Barrick’s stock price is highly correlated with the price of gold. During a market recovery, gold prices often decline as risk appetite increases, and investors shift to equities. Furthermore, while Barrick pays a dividend, its yield may not be as attractive compared to other sectors that offer higher growth prospects during a recovery.
Consumer staples
Another area where investors tend to hold out during a downturn is consumer staples. Companies in this sector produce essential products such as food, beverages, and household items. Like utilities, consumer staples are considered defensive stocks that provide steady returns during recessions. As the market recovers, investors may prefer to invest in consumer discretionary stocks that have higher growth potential.
One that I would consider avoiding first and foremost is Loblaw Companies (TSX:L). After all, the company is already facing a boycott due to higher prices, even though Loblaw is Canada’s largest food retailer and operates supermarkets, pharmacies, and other retail stores.
Beyond that, Loblaw stock’s business model provides essential goods with stable demand, but it typically offers lower growth potential compared to more cyclical sectors. During a recovery, investors may rotate out of stable, defensive stocks like Loblaw stock into sectors that benefit more from economic growth.
One to buy!
When the market is recovering however, it can be a great time to buy. But don’t just jump into stocks that are risky. Instead, consider stables stocks that should do well for the next decade, or at least until the next downturn.
Banks and financial institutions tend to perform well during economic recoveries. As the economy improves, loan demand increases, interest rates may rise (which can boost net interest margins), and overall economic activity supports financial services.
In particular, Royal Bank of Canada (TSX:RY) is a solid option. The company stands to benefit from economic expansion. Increased economic activity leads to higher demand for banking services such as lending, wealth management, and capital markets activities, which can boost RBC’s revenue and earnings.
So, with shares now at all-time highs yet still trading at 13.41 times earnings and a dividend yield of 3.8%, it’s a great time to get back into the stock.
