This week, I had the honor of joining Will Rhind, CEO of
GraniteShares at the Nasdaq in Times Square, for the closing bell ceremony to celebrate the launch of their new ETF, TSYY. It was an incredible experience, made even better by the opportunity to connect with some of the country’s leading advisors, traders, and financial product developers.
In investing, what is comfortable is rarely profitable - Robert Arnott
Wednesday’s market selloff was a harsh reminder that markets don’t just rise in a straight line. While it caught many off guard, it shouldn't come as a complete shock. The market has been riding high, and some of that excess needed to be shaken out. It’s likely this unwinding process isn’t over just yet. Markets rarely reverse course abruptly, so further volatility over the next few trading days wouldn’t be surprising. On a positive note, the spike in the VIX suggests that the period of heavy selling looks to be ending.
The Ivory Hill RiskSIGNAL™ is green, and all pullbacks should be considered buyable, even those that feel uncomfortable. This morning, we increased our Nasdaq exposure through QQQ. Why? The rapid sell-off found support at the lower end of our range band, aligning with our technical indicators. In short, while the decline was sharp, it stayed within the bounds of the long-term trend, creating a clear buying opportunity. That said, further downside isn’t off the table; it’s likely the S&P 500 may consolidate for a few more days before making another push past the 6,000 level.
The index closed out today at 5,930.84 while the VIX dropped 23.8% to close at 18.35. Remember: as long as our signal is green and the VIX is trending below 20, we want to buy every dip we can.
There’s a great deal of panic in the air, but as an advisor, my role is to provide clarity, keep everyone grounded, and set realistic expectations for the future. In this report, I’ll break down what happened and why the market responded as it did, as well as outline the steps we should take moving forward.
On Wednesday, the S&P 500 dropped nearly 3%, with small-cap stocks taking an even harder hit. Despite their YTD resilience, small-cap companies remain a critical component of the market. However, they continue to face headwinds from elevated interest rates, which drive up borrowing costs and strain their financial health.
I stand firm in my view: this is not yet a broadening bull market. For that to happen, small-caps must achieve a sustainable breakout over months and quarters—a milestone they have yet to reach. When small-caps finally hit new all-time highs, we’ll have stronger evidence that a true broadening bull market is underway. Until then, caution remains warranted.
Four key factors contributed to this dramatic selloff—two related to positioning and two tied to market fundamentals:
Overextended Expectations: The S&P 500, trading above 6,000, was priced for perfection. The Fed announcing fewer-than-expected rate cuts fell short of this expectation. For weeks, many had cautioned about the market's vulnerability to a pullback if met with genuine disappointment on critical issues, and that’s exactly what materialized.
Timing Matters: With the S&P 500 still up over 25% year-to-date, investors were positioned for a "business as usual" Fed meeting that would set the stage for a year-end rally. The Fed's decision to reduce rate cuts less than anticipated surprised many, prompting short-term traders to lock in profits before year-end, adding fuel to the selloff.
On the fundamental side:
Less Aggressive Rate Cuts: The Fed signaled it would cut rates less than what was anticipated in 2025. The Fed is now saying 2 rate cuts next year. I wouldn’t be surprised if we get less than that if inflation accelerates.
Shift in Communication: A subtle change in the Fed’s language led some to interpret the statement as a signal that rate cuts may be nearing their end. This fundamental concern weighed heavily on the market, contributing to the sharp drop.
Does This Mean the Bull Market is Over?
In short, no. Here's why:
The anticipation and execution of Federal Reserve rate cuts were key drivers of market performance in 2024. For the bull market to reverse, investors would need to perceive that the Fed’s rate-cutting cycle has conclusively ended. However, it’s not the number of rate cuts that matters most but the overall direction of rates. As long as rates continue to decline, even at a slower pace, Fed policy remains supportive of the market.
Key points counteracting fears of a bull market breakdown:
Fed Chair Powell emphasized in his press conference that rates must continue to come down. This is key. For the long-term trend to stay intact, the market needs to know that the Fed is still in a cutting cycle.
Powell also noted that current rates remain highly restrictive and need to move toward neutral, necessitating further reductions.
These statements provide a clearer signal than the language change in the FOMC statement. They reinforce that the Fed is likely still in a rate-cutting phase, maintaining a favorable environment for stocks, but less favorable than before.
Looking Ahead to 2025
While the Fed's slower pace of cuts is a short-term disappointment, the broader trajectory remains bullish. That said, 2025 is unlikely to replicate the straight-line rally of 2024. Instead, markets will face more volatility, with occasional setbacks driven by Fed announcements or economic data.
The medium- and long-term uptrend should hold as long as these questions can be answered affirmatively:
Is economic growth stable?
Is the Fed still cutting rates?
Does the Fed still think inflation is trending lower over the medium term?
Are corporate earnings solid?
If these conditions persist, pullbacks—especially in the 5%-10% range—should be seen as opportunities to buy quality stocks, cyclical sectors, and super-cap tech.
The Fed's decision delivered a genuine disappointment, but the sharp selloff was largely driven by elevated market expectations above 6,000 on the S&P 500. Unless a fresh round of negative economic surprises emerges, this pullback should remain somewhat temporary.
Despite the Cat Five Hurricane on Wednesday, the Fed is likely to stay in a rate-cutting cycle; growth is holding steady, and earnings remain robust. While the ride may be rougher than in 2024, the longer-term outlook still leans in favor of the bulls. I expect inflation to continue to accelerate to north of 3% in the first half of 2025 so that is going to be something to keep an eye for likely the next couple of years. Based on current conditions, I do not think inflation will be down to the Fed’s 2% target next year. We need to be prepared for downside volatility at the beginning of 2025.
If our long-term signal flips red, we will begin increasing cash levels. However, the signal remains firmly green for now, and we must respect the trend.
And remember - The one fact pertaining to all conditions is that they will change.
Feel free to use me as a sounding board.
Merry Christmas.
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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