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It's arguably a difficult time to be a stock market investor.
That may sound ridiculous, given that stocks have been virtually unstoppable since the start of the year. But that's just it: the market has done so well that many believe it will be difficult to keep such a blistering pace. Some Wall Street banks, like Morgan Stanley and Bank of America, are calling for a meaningful correction before the end of the year because of factors like current valuations, the prospect of rising interest rates, and Federal Reserve tapering ahead.
But that doesn't mean there aren't still opportunities to be had.
On a recent conference call, we asked Charles Schwab trading strategists JJ Kinahan and Randy Frederick where they think the best opportunities are in the market right now. They shared one sector and one stock they like at the moment, as well as areas of the market they think investors should stay away from.
Their answers are broken down below.
Stocks and sectors: The good and the badFirst, Frederick said he's bullish on the healthcare sector. It's the only stock market sector that Schwab has placed an outperform rating on relative to the rest of the market.
Frederick cited Democrats' focus on expanding healthcare.
"Under a Democratic administration, there's a lot more focus on trying to get people a lot more healthcare than what they have and improve the whole process, which — if anybody's dealt with it — is difficult," Frederick said. "It's up nearly 20% year-to-date, so it's done very well. That's the sector where we see opportunity."
Conversely, he said consumer staples and utilities are sectors to stay away from because of how much investors have flocked to the them amid the prospect of inflation. Schwab has an underperform rating on both sectors.
Interestingly, Morgan Stanley's Chief US Equity Strategist on Monday highlighted these exact two sectors as areas of the market to buy given the ongoing economic uncertainty and weakening consumer confidence as stimulus fades.
As for stocks the brokerage is bullish on, Kinahan pointed to automaker Ford (F). Traders have been stepping into the stock at higher rates recently for a few reasons, he said. One is it's low price, another is its growing focus on electric vehicles. Ford has said it anticipates electric vehicles will make up 40% of its sales by 2030.
"The one name that I'll give you that has really been popular with our clients — and I think part of it being the price point and part of it being that people are realizing what they're doing in terms of the electric vehicle space — is Ford," Kinahan said. "Ford has been down a bit since May when it sold off, and when it came into July and August, we saw bigger interest in that stock."
Relatedly, Kinahan said he thinks Tesla (TSLA) is out of room to run. The same goes for Apple (AAPL). This is due to their valuations. Both stocks are respectively up 1% and 13% year-to-date.
In the case of Tesla, Kinahan believes investors are starting to allocate capital elsewhere in the electric-vehicle space.
"Last month was the first time we saw in a long time where our clients were actually net sellers of Apple and Tesla. Those are two names that, on the TDAmeritrade side of the house, are the number-one-held stocks by our clients," Kinahan said. TDAmeritrade is owned by Charles Schwab.
"We all know bodies are strewn all over the road with people who said to sell Tesla all the way up," he continued. "But I just think that as Tesla has settled into a range, I think people are taking profits and look elsewhere for perhaps a bit of a run in some of the EV space."
As for Apple, the stock is up over 100% since the start of 2020 as the company has posted impressive earnings and sales. But such a run isn't always sustainable. The company also faces potential antitrust regulation ahead in relation to its app store business, which could sink its share price.
Kinahan and Frederick are not the only ones who are cautious on both stocks. Apple has been the largest relative underweight position among global funds over the past three months, according to a recent Bank of America report. Funds also reduced their exposure to Tesla in July.
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See Also:
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