As we head further into the new year, I wanted to share with you some of the market trends that I anticipate will either continue or develop in the coming months. While some of these projected trends aren’t entirely novel, my analysis is based on the contrarian viewpoint which I believe is integral to a successful turnaround-focused market approach.
Let’s start with one of the biggest topics of discussion among investors today, namely the inflation outlook.
Market Trend #1: Inflation, Bond Yields and Metals
To that end, the latest inflation numbers for December showed that while overall inflation continued to rise, core CPI rose less than forecast, which investors took as a sign that upward pressure on shelter costs is diminishing—in turn sparking the first meaningful broad market rally since the start of the year.
In the words of Raymond James’ chief economist, this was a “good reason” for the rally since it assumes the Federal Reserve has no problem watching the headline CPI rate temporarily increase “if that increase does not spill over into the core CPI.”
Put another way, like many economists, he’s suggesting the Fed is okay with food and energy costs rising as long as housing and rent prices aren’t increasing “too much.” And if that’s the case, investors believe this implies the central bank may not have to tighten policy going forward.
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However, if the uptrend in the 10-year Treasury bond yield is any indication, rising inflation expectations are still a worry for institutional investors. A case in point is worth mentioning: Although it tends to be underestimated by official sources, by some accounts, gasoline costs alone can amount to 20% of the budgets for many working-class American households (as referenced in a 2021 study by Aceee.org).
That doesn’t even account for electricity costs, which are apparently harder to quantify. Then there’s the official assessment that food costs account for around 11% of the typical middle-class budget which, frankly, also seems understated.
So, between energy and food costs—both of which are still increasing with no signs of abatement—inflation is obviously a much greater worry for both investors and consumers than the financial media would have us believe. And for that reason, I suspect the problem of rising consumer prices will remain a major concern going forward. For investors, this means a measure of caution is still in order since equities are still potentially at risk if bond yields resume their upward march.
Additionally, this likely means inflation-oriented investments will prove to be profitable once again in 2025. In particular, I see strength in aluminum, copper and gold stocks going forward, and I expect energy markets to outperform, driven by rising crude oil and natural gas prices. And for investors with a speculative bent, I foresee a rebound in the underappreciated (and largely forgotten) rare earth mineral-related stocks. For ETF investors, a good proxy for this sector is the VanEck Rare Earth & Strategic Metals ETF (REMX).
A corollary of rebounding rare earth demand and strong energy prices is a potential turnaround in the electric vehicle (EV) and alternate energy sector.
Market Trend #2: Electric Vehicles
To that end, EVs are expected to be a bright spot in the coming year. According to S&P Global Mobility predictions, global sales for battery electric passenger vehicles are expected to increase 30% in 2025 to 15 million units—led by strong demand in China and Europe—and which, if realized, would account for an estimated 17% of global light vehicle sales. By contrast, 2024 saw an estimated 12 million BEVs globally, for 13% market share.
Other factors in support of the EV industry having a better sales year in 2025 are China’s recent decision to adopt an “appropriately loose” monetary policy next year while implementing fiscal policies aimed at stimulating economic growth—a positive for the nation’s automobile sector and likely to have spillover implications for the U.S. market. All told, the weight of evidence suggests a brighter outlook ahead for automakers in general and for the EV industry in particular.
Another consideration for the coming months, I suspect, will be the stock market’s volatility factor.
Market Trend #3: Volatility
Specifically, Wall Street’s favorite “fear gauge,” the CBOE Volatility Index (VIX), has been “too low for too long” in my estimation. Granted, that’s a subjective and perhaps overly simplistic assessment, but one I think is nonetheless salient for 2025. It’s rare for the VIX to have more than five years of falling volatility before abnormally large volatility spikes (i.e., the VIX moving above the 40 level) kick in. And based on the performance of the last five years, we’re overdue such a high volatility spike this year.
And while I’m not predicting a bear market will unfold this year, I do believe we’ll see the market’s overall volatility factor (at times) exceed last year’s average. That’s another reason for maintaining a cautious stance and being more selective when it comes to adding new stocks to your portfolio.
For turnaround-oriented investors, it means looking closer at lower-priced shares of companies in sectors that are out of favor (like many of the ones mentioned here) and which are closer to major lows, as opposed to chasing mid-stage turnarounds that have already established a fairly strong degree of forward momentum (which was a successful tactic for much of last year).
All told, while I do expect a more turbulent year in 2025 vis-à-vis last year’s market environment, I still see many attractive opportunities in both traditional inflation-sensitive assets as well as emerging technology stocks for turnaround-focused participants.
To learn which turnaround stocks I’m targeting, subscribe to Cabot Turnaround Letter today.
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