Although the general optimism of the American mindset may see red ink as future upside opportunities, at least a few sectors may qualify as industries to avoid. Eventually, most segments of the economy should rise higher. However, some may be deflated for longer than analysts would like or anticipate.
To be sure, the concept of industries to avoid is not a popular one. Having plied my trade in this business for many years, I can tell you this much: advocates exist for every sector and they will do whatever it takes to defend their favorite industry’s honor. At the same time, my responsibility is to you, the reader – not to corporate or sector apologists. And in my humble opinion, some segments feature higher-than-normal risk. In that spirit, below are the battered industries to avoid.
Out of all the industries to avoid, real estate represents one of the “easiest” to mention. That’s because the underlying paradigm for the sector changed dramatically. Because of the rude interruption of the coronavirus, the Federal Reserve responded by injecting liquidity into the monetary system. However, this action resulted in the unprecedented rapid expansion of the real M2 money stock.
However, we didn’t start substantively feeling the pain of inflation until the velocity of M2 money stock increased. In other words, it wasn’t until consumers spent the extra liquidity into the economy at large that inflation accelerated. Of course, the Fed now seeks to unwind this monetary excess through higher interest rates. But if you look at the money stock chart, much liquidity needs to be eliminated.
Likely, a combination of factors must materialize for inflation to get back to normal. This could involve both continued rising rates and job losses (of high-paying roles). Natively, that’s not great for real estate, making it one of the industries to avoid.
On Dec. 8, 2022, I discussed the meteoric rise of apparel sharing platform Rent the Runway (NASDAQ:RENT). With the company posting better-than-expected revenue for the third quarter amid a troubled consumer economy, investors jumped on board. To the folks buying the news (instead of the rumor), they received rich rewards, gaining 51% since that time.
However, RENT may have performed well because of its subscription business model rather than a purchase-only profile. For other high-fashion-related enterprises along with the department stores that carry their products, circumstances have not been wholly auspicious. Even RENT itself slipped 46% in the trailing year despite the trailing-month upside.
Fundamentally, I’m going to rely on data from the U.S. Census. It shows that sales for clothing and clothing accessory stores largely flatlined since Nov. 2021. To be fair, the wider push to return to the office may incentivize increased sales for the general clothing segment. However, I’d anticipate that off-price retailers – think Ross Stores (NASDAQ:ROST) or TJX Companies (NYSE:TJX) – may benefit. For the luxury players? I’d consider that one of the industries to avoid.
Although 2022 brought many hardships to almost every sector, the technology space suffered significantly. Of course, when I mention this, people immediately think of the usual suspects, like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Meta Platforms (NASDAQ:META). No doubt about it, these enterprises suffer obstacles in the days ahead. However, I’m more inclined to believe in their upside potential, if not in 2023 then in 2024.
Admittedly, though, I’m not that convinced of the aspirational entities, particularly those that feature poor finances or scandals. For example, in December, I discussed the case of autonomous transportation system specialist TuSimple (NASDAQ:TSP). Although it features the potential of automating trucking, the company announced layoffs amid myriad controversies. Among them, TuSimple suffered a crash that strongly suggested the underlying tech doesn’t even work.
And if we’re going to stay in the autonomy sector, it’s hard to ignore the implosion of lidar-based enterprises like Luminar Technologies (NASDAQ:LAZR). Maybe these aspirational innovators will get back on track this year. However, investors should focus most of their energy on what works. Thus, tech startups represent industries to avoid.
In my opinion, blockchain stocks symbolize another example of easy-to-identify industries to avoid. To be clear, it’s possible that the underlying cryptocurrency market may rise a bit to provide speculators with quick profits. However, I don’t see a repeat of the ridiculously bonkers run of late 2020/early 2021. As I mentioned earlier, the monetary paradigm shifted – and shifted unfavorably for cryptos.
As I laid out in an analysis for Barchart.com, the juxtaposition of the benchmark crypto price and the real M2 money stock from October 2014 through late 2022 reveals a nearly 88% direct correlation. In other words, as money stock (inflation) rises, so does cryptos. When the money stock declines (deflation), cryptos tumble.
Therefore, with the Fed committed to tackling inflation through higher rates, cryptos carry great risk. However, blockchain enterprises that depend on rising crypto valuations arguably carry greater risk. And that’s why it’s one of the industries to avoid.
I mean, we’re already seeing reports of crypto-mining enterprises fearing bankruptcy. Former darlings in the space such as Marathon Digital (NASDAQ:MARA) lost nearly 86% of market value. Don’t play with fire here.
In my opinion, the cable TV industry represents the easiest name to target among industries to avoid. Frankly, I’m surprised that the sector even exists. And to clarify before I get inundated with vituperative emails from Comcast (NASDAQ:CMCSA) fans, I’m not referring to your company. No, I’m talking more about the direct players, such as DISH Network (NASDAQ:DISH) or Cable One (NYSE:CABO).
Fundamentally, I see cable (or satellite) TV providers suffering badly. And once the red ink is deep enough, the major players may take over. Further, I’m worried about the viability of cable TV amid intense competition from streaming services. As well, investors must be concerned about the consumer economy. If people complained about Netflix (NASDAQ:NFLX) raising its prices, what chance do cable TV providers have? Usually, this sector represents the costlier entertainment alternative. That’s not a great place to be in a recession, making it one of the industries to avoid.
From the easiest name among industries to avoid to (for me) the most difficult, global banking represents a difficult nut to crack. Fundamentally, we’re talking about the giants of commerce, names like JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC). Theoretically too, rising rates mean greater profits for banking firms, as the Federal Reserve Bank of St. Louis pointed out.
However, as the regional Reserve Bank acknowledged, “some institutions are beginning to observe declines in deposit levels as customers withdraw funds to cover rising expenses or seek higher yields elsewhere.” And that’s one of the reasons why global banking may be one of the industries to avoid. If the economy slips into a recession, it won’t matter about the profitability rate of banks. Few people would borrow money.
On another angle, global banks inherently expose themselves to international headwinds. With the geopolitical flashpoint of 2022 still raging this year, anything can happen in the new normal. Therefore, if you must invest in banking, the local or regional players may represent a superior option.
I know, I know. Electric vehicles are the future. Are they really though? Or, if I may cynically make my article more SEO friendly, are EVs one of the industries to avoid?
For some time, Toyota (NYSE:TM) remained one of the few automotive holdouts in refusing to go all in on EVs. Recently, Fox News’ editorial unit – the programming you find from dusk till dawn – sang the praise of Toyota CEO Akio Toyoda, who claimed that a “silent majority” of automakers are hesitant about the EV pivot.
Let me tell you if Fox News is siding with Toyota (and we’re talking about Japanese Toyota, not American-facilities Toyota) over EVs – a segment that Americans dominate via Tesla (NASDAQ:TSLA) – then you know it’s a matter worth investigating.
Fundamentally, the rapid proliferation of EVs may not materialize without better, wider infrastructure networks. As well, for EV batteries to achieve the net mobility output per energy spent – that is, for batteries to overcome the gasoline-powered engine’s superior energy density – consumers may need to wait until 2045. By then, some EV brands will be around but most will fail. Therefore, avoid the most speculative names.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.