Market Volatility Is Back. Here's How to Play It. -- Barrons.com

By Paul R. La Monica

It may be time to get out the Dramamine. Wall Street strategists expect a lot more volatility in the stock market in 2025. Even if the bull market keeps raging, it likely won't be a smooth ride higher.

The Cboe Volatility Index, or VIX for short, has climbed closer to 20 after dipping below 13 in the month after the election. Wall Street's so-called fear gauge could continue to climb as investors brace for the possibility of more trade tensions during the second Trump administration if the president-elect pushes for higher tariffs.

The recent stock market pullback may be a sign that Wall Street is preparing for more unpredictability in Washington, even though Republicans control both the House and Senate -- albeit by the slimmest of margins.

The bulls may also simply be exhausted after two straight years of more than 20% annual gains for the S&P 500, a rally that largely rested on the shoulders of Nvidia, Broadcom, and other giant tech stocks. It could be time for new leadership to emerge, and that process could bring about more volatility.

Katie Stockton, founding and managing partner of Fairlead Strategies, noted in a report Friday that relative strength "has shifted away from megacap-heavy sectors over the past week, favoring energy, utilities, and healthcare in a notably defensive shift."

Stockton added there is an increased "likelihood that volatility will expand further this month," a move that could push the S&P 500 lower and the VIX back up above 23. That would be 35% higher than current levels.

Market volatility is also normal once the calendar changes, according to Melissa Roberts, an analyst at Stephens. And there are ways to profit from any spikes in the VIX.

"Investor risk appetites are highest at the start of a new year," Roberts pointed out in a report Thursday. She added that higher-volatility stocks in the Russell 2000 index have outperformed lower-volatility ones during January and February in seven of the past eight years.

With that in mind, Roberts identified several small- and mid-cap stocks that could outperform in the first two months of 2025, as well as some that may lag.

The potential winners? Fintechs LendingTree and Redfin made the list, as did healthcare company CareDx, a leader in services for organ transplant patients. Stocks to potentially avoid? Roberts said egg producer Cal-Maine Foods, logistics firm Hub Group, and trucking company Werner Enterprises could underperform in January and February.

There are still larger-cap stocks that could also hold up relatively well in a more volatile environment, though. Ken Laudan, portfolio manager of the Buffalo Blue Chip Growth fund, said the key is for investors to look for companies with strong balance sheets that are generating high levels of cash flow.

"The market environment is more replete with uncertainties heading into 2025 than in recent memory," he told Barron's. "I'm still optimistic about the U.S. economy but we're cautious. The margin of error is small."

That's why Laudan thinks investors should be focusing more on higher-quality growth stocks, particularly in the healthcare, industrials, and materials sectors. He holds medical diagnostic testing firm Thermo Fisher Scientific, renewable power giant GE Vernova, industrial conglomerate Honeywell, and building materials company CRH in his fund.

So investors shouldn't fear the possibility that the stock market will experience more twists and turns. Instead, they need to embrace the types of stocks that should hold up better amid any Wall Street turmoil.

Write to Paul R. La Monica at paul.lamonica@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

January 03, 2025 14:08 ET (19:08 GMT)

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