ANNOUNCEMENTS
January 15: Q4 estimated payment deadline for the prior year
January 31: Income tax return (Form 1040) filing and payment deadline
to avoid late penalty for Q4 estimate, if it was not timely
paid.
In this week’s report, I’ll break down the latest market trends, including the sharp selloff, rising volatility, and what the technicals are signaling about key levels to watch. I’ll also explore why 2025 presents a higher bar for equity gains, the macroeconomic drivers shaping market conditions, and how Trump’s deregulation agenda could create opportunities in specific sectors. To wrap up, I’ll outline tomorrow’s critical jobs report and the scenarios that could dictate the market’s next move.
The Ivory Hill RiskSIGNAL™ is green, and any pullback should be viewed as a buying opportunity. The trend is more important than any single data point. Our short-term volatility signal is red, so expect higher volatility. Last week’s selloff was sharp but has likely released some pressure from the market. After two consecutive 20%+ years in the S&P 500, many question how long the rally can continue. The answer is uncertain, which is why we lean into the trend more than anything else. 2022’s secular bear market, lasting over 16 months, set the stage for the current cycle. Markets often rise for three years before slowing, so a 10-12% gain in 2025 is a reasonable expectation.
Given that the VIX spiked to the top end of our trading range yesterday and is not yet trending above 20, our rules dictate to buy, so we added to our NVDA, AVGO, and MAGS positions.
Technicals
Given the resistance overhead and the break of the trendline, the market appears likely to retest lower levels in the short term. If the 5,867 support fails, a move toward the next major support at 5,705 is likely. On the other hand, if the market manages to reclaim the resistance zone above 6,035, it could negate the bearish outlook and signal further upside. For now, the bias leans toward further downside unless critical levels are reclaimed.
The technicals continue to suggest there are lingering upside risks of more volatility. A close below 17.16 would be bullish for equities.
But wait ... there's more!
Dealer gamma exposure is currently negative, which can be a signal for higher volatility ahead. One reliable short-term indicator of market volatility is how market makers adjust their positions using a strategy called delta-neutral hedging. This strategy can significantly influence the market, either calming it or making it more volatile.
When options dealers have positive gamma, the market is typically less volatile. This is because dealers buy stocks when prices drop and sell stocks when prices rise, which helps stabilize the market.
On the other hand, when options dealers have negative gamma, the market tends to be more volatile. In this case, dealers sell stocks when prices drop and buy stocks when prices rise, which can amplify market volatility.
The bottom line is that we want to see the market rally through 5,961 to put the market in positive gamma. That is only 43 points or 0.72% from yesterday’s close.
At the beginning of the year, cash in money funds stood at $5.88 trillion. Today, it totals $6.84 trillion, an increase of 16.33%. With 3-month T-bill yields averaging 5.00%, that implies a net inflow of nearly $0.96 trillion! Rates have been moving higher even as the Fed has been cutting rates.
There are two conditions when you should look to buy bonds:
When a recession is imminent.
When inflation is decelerating fast, trading bonds is a much better strategy than buy and holding. When inflation starts to go down, you should see the price of bonds move higher.
Volatility and Market Context
The driving forces behind the year-end volatility were less about fundamental changes and more about structural market conditions. Specifically, thin liquidity, coupled with typical year-end portfolio adjustments, created an environment ripe for exaggerated price movements.
The sharp declines in the tech sector were largely a necessary recalibration after unsustainable outperformance over the prior month.
Over the past three weeks, volatility levels have noticeably increased, marking a shift from the relative calm that characterized much of 2024. This trend captions a broader reality as we enter 2025: the threshold for additional market gains will be significantly higher than in the previous year.
Why the Bar Is Higher in 2025
Markets have already priced in many favorable developments. Meeting those expectations alone is unlikely to drive meaningful upside. Here’s why:
Federal Reserve Policy ExpectationsIn 2024, the Federal Reserve delivered rate cuts that boosted market sentiment. For 2025, investors anticipate further cuts. However, a mere two rate reductions will likely fall short of expectations. Markets will require either more aggressive easing or unexpected positive developments in monetary policy to propel equities higher. Neither is likely.
Political and Legislative ImpactOptimism surrounding a “Red Sweep” in the 2024 elections played a key role in the post election rally. In 2025, the new Congress and administration must translate that optimism into tangible pro-growth policies, such as tax cuts and deregulation. Furthermore, they must manage trade dynamics carefully, avoiding the resurgence of tariff-related headwinds that could derail progress.
Economic Resilience and Soft Landing SustainabilityThe soft landing achieved in 2024 was a critical underpinning of market stability. As we move into 2025, maintaining that equilibrium becomes crucial. Any signs of economic slowdown will reignite fears of a hard landing, while unexpected acceleration in growth would reduce the likelihood of further monetary easing. Both scenarios would create headwinds for stocks.
What Could Drive Markets Higher in 2025?
While expectations are elevated, additional market gains are achievable—provided we see new, positive surprises. Key drivers to watch include:
Tax and Regulatory PolicyFaster-than-expected implementation of tax cuts and deregulation would provide a significant boost to market sentiment. Swift and effective legislative action would reinforce the pro-growth narrative.
Deeper Federal Reserve EasingShould inflation decline more rapidly than what old Wall Street expects, the Fed may implement more than two rate cuts. Such an outcome would provide an unanticipated tailwind for equities. This is highly unlikely.
Geopolitical ResolutionsProgress toward resolving the ongoing conflicts in Ukraine and the Middle East will reduce geopolitical uncertainty, restoring investor confidence and stabilizing risk premiums.
AI-Driven Productivity GainsWhile much of the AI optimism in 2024 centered on semiconductor manufacturers, 2025 needs objective evidence of AI-driven productivity and profitability gains for end-user companies. Demonstrating tangible benefits beyond chipmakers would validate the long-term AI thesis.
Risks to Consider
The absence of new positive catalysts could lead to a challenging environment in early 2025.
Potential risks include:
Fed Uncertainty: Prolonged debates over the extent and timing of rate cuts will weigh on sentiment.
Legislative Delays: Political infighting will derail or slow the passage of critical pro-growth policies.
Geopolitical Tensions: Escalation of conflicts or lack of progress in resolving current crises will dampen risk appetite.
Economic Imbalances: Either excessive slowing or unexpected acceleration will disrupt the delicate soft landing narrative.
If these risks materialize, markets will experience extended sideways movement punctuated by pullbacks.
Outlook
As we enter 2025, the market backdrop remains cautiously optimistic (I hate that phrase, but it fits), supported by:
1️⃣ The continuation of the soft landing,
2️⃣ The Federal Reserve’s rate-cutting cycle,
3️⃣ Reasonable optimism about pro-growth policies,
4️⃣ Continued disinflation trends, and
5️⃣ AI-driven innovation.
However, these factors are already priced into the market. To sustain upward momentum, fresh and favorable developments will be necessary. Without new catalysts, we will have elevated volatility and a challenging start to the year.
Successful navigation of these conditions will require vigilance. Monitoring Fed policy, legislative progress, geopolitical developments, and economic data will be critical for identifying opportunities and mitigating risks in the months ahead.
Macro Positioning
I expect a relatively favorable environment for risk assets in the first half of 2025, but it’s not going to be smooth sailing. Volatility will dominate as the market oscillates between two contrasting macro environments, both characterized by accelerating inflation.
Environment One: Accelerating economic growth and relation.
Environment Two: Decelerating economic growth and stagflation.
Monthly Breakdown (Hypothesis)
January: Reflation
February: Stagflation
March: Reflation
April: Reflation
May: Stagflation
June: Deflation
Given current market conditions, I believe the most likely time for a correction (a decline of 10% or more) could occur in late June or early July, aligning with my expectation that inflation will exceed 3% by the end of Q2. In my view, the Fed has made a critical policy mistake—they should never have started cutting rates as early as they did. As inflation rises, markets will be forced to reckon with the realization that further rate cuts are unlikely. This thesis is based on the data and research available to me at this point in time. However, a significant wildcard remains: Trump’s policy agenda and the speed at which he can implement his mandates, which could shift the conditions significantly.
Investing in Reflation: Accelerating Growth and Inflation
Historically, these asset classes and sectors perform well or poorly during reflationary environments:
Best Asset Classes: Commodities, stocks, credit, crypto, and forex
Worst Asset Classes: Fixed income
Best Equity Sectors: Tech, industrials, financials, energy, consumer discretionary
Worst Equity Sectors: Utilities, communication services, consumer staples, REITs, healthcare
Investing in Stagflation: Decelerating Growth with Accelerating Inflation
Conversely, in stagflationary environments, the winners and losers shift:
Best Asset Classes: Gold, commodities, fixed income
Worst Asset Classes: Credit
Best Equity Sectors: Utilities, energy, REITs, tech, consumer staples, healthcare
Worst Equity Sectors: Communication services, financials, consumer discretionary, industrials, materials
Sector Conflicts & Volatility
These two environments present inherent conflicts. For example:
In a reflationary setting, the top-performing sectors—industrials, financials, and consumer discretionary—are among the weakest during stagflation.
Such contradictions are going to drive aggressive sector rotations, leading to significant upside and downside volatility.
One constant stands out: Technology. As a strong performer in both scenarios, maintaining exposure to tech is prudent, particularly given its role in driving market gains in recent years.
The Trump Factor: Policy Shifts and Sector Impacts
A wildcard is the return of Trump to office, with deregulation likely becoming a major policy driver. His proposed "Ten-Out" rule to eliminate ten regulations for every new one could significantly impact specific sectors.
However, patience is essential. During his first term, Trump’s deregulation efforts had the lowest success rate in court compared to the past four administrations. While opportunities may emerge, progress could be slow and uneven.
As seen below, the biggest outperformers during a Trump presidency could be the most regulated industries.
Next week, I’ll be sharing a curated list of stocks we're closely watching that could benefit from deregulation under the Trump administration. Stay tuned!
I would like to end this report by focusing on tomorrow’s jobs report, which could dictate whether the market continues its downtrend or sustains a rally.
Here's how different scenarios might play out:
Scenario 1: A "Goldilocks" Jobs Report (50k–200k Jobs Added)
Data:
Jobs added: 50k–200k
Unemployment: 4.1%–4.3%
Wage growth: ≤ 4%
Market Reaction:
Modest relief rally across all major indices.
Small caps and tech lead the gains as optimism returns.
Scenario 2: A "Too Hot" Jobs Report (Over 200k Jobs Added)
Data:
Jobs added: > 200k
Unemployment: < 4.1%
Market Reaction:
S&P 500 declines by 1% or more due to heightened fears of additional Fed tightening.
Small caps will lead the decline, with tech and industrials underperforming as higher rates pressure growth-sensitive sectors.
Scenario 3: A "Too Cold" Jobs Report (Under 50k Jobs Added)
Data:
Jobs added: < 50k
Unemployment: > 4.3%
Wage growth: < 4%
Market Reaction:
Would signal economic weakness, sparking concerns about a recession.
Defensive sectors like utilities, healthcare, and consumer staples outperform.
Risk assets like small caps and cyclicals (e.g., financials and industrials) underperform.
The market may initially rally if investors interpret the report as a sign of a Fed pivot, but gains will be short-lived as recession fears take hold.
This jobs report is important, offering clues about the economy’s resilience and the Fed’s next move. A Goldilocks report would be ideal for sustaining the rally, while either extreme—too hot or too cold will increase market volatility.
And remember - The one fact pertaining to all conditions is that they will change.
Feel free to use me as a sounding board.
Best regards,
-Kurt
Schedule a call with me by clicking HERE
Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President
Email: kurt@ivoryhill.com | ivoryhill.com
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