My favorite stocks to buy right now for protection and growth against an uncertain market
The stock market has been crazy lately, as if stock prices aren’t supposed to go up forever! Stocks were getting expensive and long overdue for more than a small correction anyway.
But that doesn’t mean you don’t want to make money. The fact that stock prices need to fall every once in a while doesn’t mean you can put your returns on hold and still meet your financial goals.
I’ve been following the factors threatening the market for a while and have found a few stocks and sectors that should hold up even if the stock market tumbles.
I still recommend putting most of your money in a mix of broad funds around your long-term strategy but looking for the best stocks to buy can provide for a little extra return when you need it most.
Factors Pointing to the Best Stocks and Sectors for 2018
It’s never just one thing that causes stocks to crash but you can generally reduce it to a few primary factors.
I’ve worked as an economist, doing top-down research, and as a stock-picker for money managers. I like the broader, birds-eye investing better because these primary factors usually drive the bigger moves in the market and are easier to spot.
Once you know the big market drivers, you can more easily focus on sectors, industries and individual stocks that should do well. Then you can narrow it down to the best of breed companies that will outperform.
I’ve heard lots of reasoning why the market is so volatile lately but it really boils down to two factors, interest rates and inflation.
- Rates are important because it’s historically-low rates that have driven the bull market. Cheap money meant that companies could borrow to grow their business, buy back stocks and consumers could use debt to drive spending. The Fed has been raising rates since December of 2015 but only really got serious last year. It’s expected to increase rates another three times at least in 2018 and that could really start to weigh on the economy.
- Inflation is related to rates because the Fed will need to hike rates faster if prices rise too fast. The fact that inflation has been so low for so long is one of the miracles of this bull market but we’re seeing clues that it could be the big surprise of the year. Multi-year lows in unemployment, a weaker dollar and other factors are going to push prices higher.
There are a lot of factors that drive the economy but the fact that these two have been so low for so long (and now are changing) is what is shocking the stock market. Inflation is usually the hangover that comes with very low rates. Investors and the economy got addicted to that cheap money but now the hangover is coming and higher rates are the bitter medicine.
In this environment, there are a few sectors and ideas that should continue to provide positive returns. I’m highlighting financials, inflation-protection assets and health care as the best stocks to buy now.
Remember though, picking good stocks doesn’t mean anything if you blow it all on trading fees and other costs. Invest with a long-term approach and use inexpensive platforms like Ally Invest to save money each time you buy.
I’ve used Ally Invest since it was TradeKing and like the platform for passive investing and its low fees. Compare the fees on Ally Invest with your online platform.
Best Stocks to Buy in Financials
Stocks of financial companies can run into trouble if the economy falls apart but we’re not looking at a recession. The new tax cuts, regardless of who they help most, will support economic growth through this year and probably 2019.
That means banks will benefit from higher interest rates without getting hit by lower loan demand in a recession.
Wells Fargo (WFC) may be one of the best stocks to buy all year with the recent trouble it’s had. Shares have underperformed the broader financials sector by a wide margin over the last year and plunged in February when regulators put a rare growth ban on the bank.
But Wells Fargo is the nation’s largest mortgage lender and a top-quality bank. Before the recent scandals, it was known for its premium customer service and Warren Buffett couldn’t get enough of the stock.
Investors and the market have a very short attention span and it won’t take long for WFC to grow past the current scandals. The regulatory ban is harsh and odd given Washington’s push for less regulation. The ban won’t be in place for long and the shares will surge when it’s removed. Until then, investors collect a solid 2.5% dividend on a stock that is cheap relative to the market.
Best Stocks to Buy for Inflation-Protection
If inflation is to be the big surprise this year then investors need to start thinking about how to protect their portfolio against it. The fact that price increases will still be relatively low means less than the difference in the increases, the fact that inflation has increased so quickly against almost nothing over the last several years.
This is going to put gold and other inflation-protection in the spotlight for best stocks to buy.
Prepare to see a gold investment commercial every five minutes on TV…but that’s not the way to go. I don’t like investing directly in gold because it produces nothing. All of your return depends on buying low and selling high.
Instead, look for stocks of gold miners. They’ll benefit with the increase in gold prices and pay strong dividends. Miners will grow profits as gold comes back in favor. Even if gold prices come down again, those profits will remain and will be passed along to investors.
I own El Dorado Gold (EGO) but you can also buy the Gold Miners ETF (GDX) to get broad exposure to the theme.
I also like real estate investments as inflation protection. Real estate doesn’t tend to do as well with higher interest rates but the rising economy will support demand and the asset is one of the best for inflation. Real estate could also get a big boost from the tax cuts as pass through companies see their taxes decrease and can buy more property.
Individual investors have two options for real estate investing, REITs and real estate crowdfunding. I invest in both for maximum diversification and returns.
REITs are easy to buy and trade just like stocks. Dividends tend to be higher than other stocks because the companies return most of their profits to investors. Average returns on REITs have been around 12% to 15% for the last several decades.
Real estate crowdfunding has become the hybrid between REIT investing and direct property investing. For as little as $1,000 in a property, you get professional management and higher returns than you’ll find in stocks. Project owners and properties are vetted by the platforms and you get instant diversification in property type for less than the cost of buying one rental directly.
I invest on two crowd platforms, RealtyShares and PeerStreet. PeerStreet offers only debt investments which are lower returns but less risky and provide solid cash flow. RealtyShares offers both debt and equity investments in real estate.
Best Stocks to Buy in Health Care
Stocks of health care companies have been volatile for more than a year on changes to the Affordable Care Act and rumors of competition from other industries. The demand for the sector is undeniable with tens of millions of baby boomers just entering peak health care usage years.
Interest rates and inflation won’t affect health care as much. You aren’t going to stop going to the doctor because of higher interest rates and health services inflation is actually coming down a little in some segments.
CVS Health Corporation (CVS) is quickly becoming an unstoppable giant in American healthcare. Through growth and acquisitions, it is in just about every part of healthcare delivery from pharmaceuticals to clinic service and soon insurance through its proposed merger with Aetna.
This gives it unrivaled negotiation power and helps it guide patients every step of the way.
Shares have underperformed the broader health care ETF (XLV) since October when fears of drug pricing regulation increased and the stock plunged in January when Amazon said it would create a health care company along with Berkshire Hathaway and JP Morgan. Neither of these reasons is a near-term threat to CVS and the stock is a bargain at this price.
Understand that the best stocks to buy now may not be the best in a year. I’ve used the factors driving the stock market and recent events within individual companies to find some great stock picks, but you’ll need to check these stocks for how they’ve done since this article was published. All of the stocks recommended are quality companies with strong long-term potential so they’ll make for good long-term investments to fit with your broad investing strategy.