Day Hagan Catastrophic Stop Update March 4, 2025
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The Catastrophic Stop model declined to 70.7% from 72.9% last week due to a relative strength measure calling stocks versus bonds turning negative. The model’s internal indicators remain bullish, though less so with this week’s update, and the external indicators are neutral.
Figure 1: Catastrophic Stop Model vs. S&P 500 Total Return
Concerns around tariffs, global economic growth, inflation, and geopolitical tensions continue to roil the markets. Regarding tariffs, GS notes that “The 10pp hike in the China-focused tariff would raise the US effective tariff rate by 1.2pp and increase core prices by around 0.1%. A 25% tariff on Canada and Mexico (10% on Canadian energy) would raise the effective tariff rate by 5.7pp, and core prices by around 0.6%.” While not ideal, two things to consider: 1) the tariffs could be removed as quickly as they were placed, and 2) although the tariffs are likely modestly inflationary, the current economic slowdown will likely help to counterbalance the tariff’s impact. While we view the tariffs as a headwind, we are more concerned with the prospects for economic growth.
We often feature the table below, which describes financial asset performance during myriad growth and inflation regimes. Currently, U.S. economic growth is still “rising,” while inflation pressures are rated “neutral.” As illustrated in the table, should economic growth move from “rising” to “stable” and inflation shift from “neutral” to “rising,” equities have still evidenced gains, on average, at a 6.8% annualized rate of return.
Figure 2: Slowing economic growth and rising inflationary pressures have tended to mute gains. However, the main concern is when economic growth weakens substantially.
The Atlanta Fed’s GDPNow model received quite a bit of attention yesterday when the latest update was released. It estimated real GDP growth for Q1 2025 at -2.8%, down from the February 28 estimate of -1.5%.
Figure 3: Investor concern about economic growth ratcheted up with the latest estimate from the Atlanta Fed GDPNow model. However, there are some idiosyncrasies to be aware of.
A significant portion of the model's decline can be attributed to a widening of the trade deficit. And that widening of the trade deficit is being described as the direct result of U.S. companies pulling forward orders in advance of potential tariffs and, reportedly, U.S. gold imports. If this is the case, it is important to note that, according to JPM, these inputs will be stripped out of the official GDP measures.
As you can see in the second table below (Titled: 3-3-2025), Net Exports lowered the GDPNow estimate by -3.57 percentage points. Without the Net Exports component, the GDPNow forecast would be positive 0.77%. Not great, but not recessionary.
Figure 4: The increase in the trade deficit significantly impacted the model’s result. As shown in the bars before 2-28-2025, net exports (in light teal) typically subtracted less than 0.5% from the GDPNow model estimate.
Figure 5: The details of the latest GDPNow forecast. We’re keeping an eye on the critical “Consumer Spending” metric.
While we monitor the GDPNow model, we focus on the NDR Economic Timing Model for signs that the broader economy is experiencing more pressure. The most recent reading portrays an environment supportive of continued economic growth.
Figure 6: The broad-based NDR Economic Timing Model supports a “Growth Rising” regime.
Below are the indicators and latest readings for the model. All of the negative indicators are directly related to the Leading Economic Index (source: Conference Board).
The Conference Board wrote the following in their January update (released February 20): “The US LEI declined in January, reversing most of the gains from the previous two months. Consumers’ assessments of future business conditions turned more pessimistic in January, which—alongside fewer weekly hours worked in manufacturing—drove the monthly decline. However, manufacturing orders have almost stabilized after weighing heavily on the Index since 2022, and the yield spread contributed positively for the first time since November 2022. Overall, just four of the LEI’s 10 components were negative in January. In addition, the LEI’s six-month and annual growth rates continued to trend upward, signaling milder obstacles to US economic activity ahead. We currently forecast that real GDP for the US will expand by 2.3% in 2025, with stronger growth in the first half of the year.” If this proves accurate, we expect the current decline to be within the normal bounds of a healthy correction.
Figure 7: Economic Timing Model Indicators
Regarding our sector allocations and rebalancing on Monday, we decreased exposure to Consumer Discretionary, Financials, and Industrials. We increased exposure to Consumer Staples, Communication Services, and Real Estate. The net result is that the portfolio is now overweight in Utilities and underweight in Information Technology, while neutral on the rest of the sectors. Our sector review is below (for more information, go to DayHagan.com/Research):
Sector Review (3-3-2025)
Consumer Discretionary: The Consumer Discretionary composite model declined with the March update. Measures of trend, overbought/oversold reversals, momentum, breadth, housing starts, and long-term interest rates are now negative. We are reducing exposure to a neutral allocation.
Commentary: So far in 2025, the Consumer Discretionary sector has faced significant challenges, emerging as the worst-performing sector thus far. Investors have shifted their focus to defensive sectors, notably Healthcare and Consumer Staples, amidst rising inflation concerns. The latest Consumer Price Index report revealed a year-over-year inflation rate of 3.2% and a 0.2% month-over-month increase in core prices. This stronger-than-anticipated inflation data has tempered expectations for imminent Federal Reserve rate cuts, leading to a rise in 10-year Treasury yields to approximately 4.5%. Higher yields have pressured Consumer Discretionary stocks, impacting major players like Tesla and Home Depot due to increasing borrowing costs for significant purchases. Earnings reports from Q4 2024 displayed mixed results, with firms like Amazon and Nike experiencing post-earnings sell-offs despite solid holiday sales driven by profit-taking and high valuations. In contrast, off-price retailer TJX Companies thrived as consumers sought value amid inflation. The sector has also been affected by tariff-related cost increases, particularly impacting manufacturers in apparel and electronics. Overall, the sector's performance in February reflected a complex interplay of persistent inflation, cautious Fed policy, and evolving investor sentiment, highlighting both challenges and emerging opportunities within the space.
Consumer Staples: The composite model improved to neutral, with measures of overbought/oversold, breadth, national financial conditions, and food sales growth metrics positive. Conversely, indicators calling trend, momentum, net new highs, short interest, pricing power, and valuations are negative. The net result is that we are modestly adding exposure and are now neutral overall.
Commentary: In February, the S&P 500 Consumer Staples sector demonstrated resilience amid challenging macroeconomic conditions and shifting investor attitudes. Inflation concerns were at the forefront, with January's Consumer Price Index revealing a year-over-year increase of 3.2% and core prices rising by 0.2% month-over-month. This inflationary environment enhanced the appeal of consumer staples, as products such as food, beverages, and household items typically maintain steady demand despite price fluctuations. However, the surge in inflation pushed 10-year Treasury yields to approximately 4.5%, leading investors to consider the comparatively lower yields offered by consumer staples. Earnings reports for Q4 2024, released in early February, painted a mixed picture. Major players like Procter & Gamble and Coca-Cola showcased resilient demand, capitalizing on their pricing power despite rising costs. At the same time, Walmart benefited from its value-focused strategy amid consumer inflationary pressures. In contrast, smaller firms struggled, with only about 60% of sector companies exceeding earnings expectations. Investor sentiment favored staples as a haven amid volatility in growth-oriented sectors, indicated by technical indicators showing the Consumer Staples Select Sector SPDR Fund (XLP) above its 50-day moving average. However, the sector faced challenges from potential trade policy changes and the risk of an economic slowdown, underscoring its defensive stance.
Communication Services: The composite model improved to neutral, with mixed technical and fundamental indicators. Valuations and short-term trend and yield curve trend indicators are supportive. Short-term overbought indicators are headwinds. We increased exposure and are now neutral.
Commentary: In February, the S&P 500 Communication Services sector faced a challenging environment. The January Consumer Price Index (CPI) increased, with core prices rising 0.2% month-over-month, exceeding expectations. This uptick prompted a rise in 10-year Treasury yields to approximately 4.5%, adversely affecting growth stocks like Meta and Alphabet that depend on discounted future cash flows. Additionally, Fed Chair Jerome Powell’s hawkish comments indicated no forthcoming rate cuts due to ongoing inflation and a robust labor market, which impacted sentiment toward high-valuation stocks while favoring stable telecom companies like Verizon. Q4 2024 earnings results portrayed a mixed landscape; tech-centric firms such as Alphabet and Netflix experienced revenue growth from advertising and streaming but faced post-earnings sell-offs amid concerns about ad spending in the inflationary environment. In contrast, telecom leaders like AT&T were likely buoyed by steady subscriber growth and ongoing 5G investments. Sector rotation saw investors shifting from growth-oriented companies to more defensive sectors, contributing to volatility, while 31.4% of the sector’s revenue came from foreign sources, highlighting the sector's global exposure.
Energy: The composite model remains neutral, with relative strength, rig count, and U.S. dollar indicators positive, and overbought/oversold, volatility, breadth, cash flow, inventory, and term-structure indicators negative. The net result is a low-neutral allocation.
Commentary: West Texas Intermediate (WTI) crude oil fluctuated between $68 and $75 per barrel, a level supported by strong U.S. production—nearing record highs due to favorable policies from the Trump administration—and OPEC+ production cuts aimed at maintaining stability in global supply. While upstream firms like ExxonMobil benefitted from these conditions, refining companies such as Valero faced squeezed margins as the gap between crude and gasoline prices narrowed. Additionally, natural gas prices surged, driven by regional demand and Europe’s heightened need for liquefied natural gas (LNG) amid ongoing supply disruptions, favoring companies like EQT Corporation. Q4 2024 earnings reports, released in early February, indicated mixed profitability across the sector. Midstream firms like Targa Resources likely excelled due to steady cash flows from transportation and storage, relatively insulated from volatile prices. Conversely, refiners struggled with excess capacity and decreasing gasoline demand, impacting companies like Marathon Petroleum. Despite favorable policies boosting exploration sentiment, traditional fossil fuel companies dominated market performance, overshadowing the nascent renewable energy segment. Overall, the energy sector demonstrated some resilience despite challenges in refining and supply dynamics.
Financials: The composite model declined with the March update and is now neutral. Positive indicators include relative price trends, lower financial sector volatility, relatively muted downside drawdowns, intermediate-term strength in the U.S. dollar, and G10 economic releases generally outpacing expectations. Negative indicators include overbought conditions now in place, a slight uptick in financial institutions’ credit spreads, slowing bank loan growth, and a just-inverted yield curve. Given the model decline, we are reducing financial sector exposure to a neutral allocation (relative to the benchmark).
Commentary: The financial sector, encompassing banks, insurance companies, capital markets, and consumer finance, navigated a complex landscape influenced by interest rates, regulatory changes, and operational challenges. The interest rate environment remained a critical factor; January's Consumer Price Index indicated a 3.2% year-over-year inflation rate, while 10-year Treasury yields hit 4.5%. This environment supported net interest margins (NIM) for major banks like JPMorgan Chase and Bank of America, enabling them to benefit from higher loan yields compared to deposit costs. However, cautious remarks from Fed Chair Jerome Powell led to uncertainty regarding potential rate cuts, impacting mortgage banking revenues reliant on lower rates for refinancing. In earnings reports for Q4 2024, major banks such as Goldman Sachs and Morgan Stanley experienced significant growth, driven by a 33% increase in capital markets activities, particularly a 52% rise in investment banking. In contrast, insurance firms like AIG faced a year-over-year decline of 11% due to rising claims. Overall, while the financial sector demonstrated modest gains, these were tempered by challenges in insurance performance, slow loan growth, and overarching macroeconomic uncertainties.
Health Care: The HC composite model improved, and we are adding exposure. Price trends, short-term momentum, breadth, increases in the CPI for medical care (pricing power), higher health care personal expenditures, valuations, and earnings revision breadth are supportive. We are increasing exposure.
Commentary: In February, the S&P 500 Health Care sector experienced notable growth, driven by a combination of macroeconomic trends and sector-specific developments. Pharmaceutical and biotech companies saw robust performance, particularly Gilead Sciences, which reported Q4 2024 earnings forecasts exceeding expectations, leading to a 7.5% stock increase due to optimism around its antiviral and oncology products. Eli Lilly's weight-loss drug, Mounjaro, contributed to revenue growth despite ongoing supply limitations. Medical device firms like Medtronic benefited from an uptick in elective procedures, although rising inflation-related input costs pressured margins. Earnings results from Q4 2024 were strong overall, with an estimated 65% of sector companies, including Pfizer, surpassing expectations, largely thanks to pricing power and new drug approvals. UnitedHealth Group noted strong membership growth but also rising medical loss ratios, reflecting increased utilization across the sector. Smaller biotech firms faced challenges in securing funding amid high Treasury yields, though leaders like Amgen showcased cash-flow resilience. Regulatory uncertainty persisted, but potential FDA deregulation improved sentiment. Despite these challenges, the Health Care sector demonstrated solid gains, characterized by growth potential and defensive stability amid market volatility.
Industrials: Several indicators rolled over as concerns about economic growth increased. Momentum waned, sector volatility increased, cashflow yields declined, oil futures declined (potentially leading to lower capex from energy infrastructure providers), and the U.S. dollar’s longer-term uptrend is negative. Nonetheless, the sector is oversold, and new lows are expanding, indicating that support may be building. The net result is a slight reduction in exposure to a neutral allocation.
Commentary: In late 2024, the re-election of President Trump introduced uncertainties regarding potential tariffs on imports from key trading partners like China, Canada, and Mexico. Economists warned that such tariffs could reduce global trade by 10% and decrease U.S. economic growth by 1%, negatively impacting corporate earnings and increasing inflation. While trade uncertainties persist, infrastructure investments are expected to sustain demand in the industrial sector, with companies like CRH projecting $7.5 billion in EBITDA for 2025. Earnings reports reflected mixed performance within the sector. Cleveland-Cliffs experienced an $81 million loss due to challenging steel demand, while Johnson Controls reported a strong earnings surge, boosting its stock by 11.3%. FMC Corporation faced a 33.5% decline in stock value due to reduced customer inventory levels. As of February 28, 2025, the S&P 500 Industrials sector's P/E ratio was 25.98, above its five-year average, suggesting potential overvaluation despite projected earnings growth of 11.1% for the S&P 500 in 2025. Ongoing issues such as rising input costs, labor shortages, and supply chain disruptions continue to pressure manufacturers amidst solid demand driven by infrastructure initiatives and defense spending.
Information Technology: The composite model remains negative, and we continue to be modestly underweight. Momentum indicators are weak, the sector is still overbought longer-term, rising inflation expectations are a headwind (negatively impacting all long-duration assets), and relative valuations are neutral. As for a potential setup for a bullish reversal, a high short-interest ratio for the sector is bullish from a contrary opinion perspective, and earnings revision breadth is positive overall. We remain modestly underweight and will add exposure as technical indicators reverse from bearish to bullish.
Commentary: The introduction of tariffs by the Trump administration on imports from China, Mexico, and Canada heightened costs for semiconductor components, raising concerns about inflation in consumer electronics and potential decreases in corporate tech budgets. Earnings reports revealed mixed results; Nvidia's earnings modestly beat expectations but led to an 8.5% stock drop due to gross margin concerns, while Alphabet's shares fell 7.3% despite surpassing profit predictions due to slower cloud business growth. In contrast, Snowflake's stock surged by 13% due to strong demand forecasts in AI. The broader market saw a shift in investor focus as major tech companies like Apple and Microsoft struggled with high valuations and slowed growth, prompting a rotation toward sectors like finance and healthcare. Overall, the tech sector's growth narrative remained intact, driven by AI and cloud resilience, but faced headwinds from still-high valuations, supply chain disruptions, and regulatory scrutiny.
Materials: The Materials sector composite model improved, with measures of trend, momentum, oversold, emerging market equity momentum, copper futures trends, valuations, and industrial production for materials now constructive. Conversely, the sector’s relatively high volatility, recent pullbacks in gold and silver, and a relatively low earnings yield are negative. We are increasing exposure in response to the model and are neutral relative to the benchmark.
Commentary: In February, the S&P 500 materials sector struggled, along with Consumer Discretionary, Industrials, Technology, and Communications. This sector declined by 0.3%, facing challenges from high interest rates, a sluggish Chinese economy, and concerns over U.S. economic strength. Notably, the materials sector was one of three to report a year-over-year revenue decline in Q4 2024, along with Industrials and Energy, reflecting its vulnerability to economic shifts. Economic indicators, such as weak home sales and dropping consumer confidence, negatively impacted construction-related stocks like Owens Corning, despite the company exceeding earnings expectations with a $3.22 EPS. The looming threat of new U.S. tariffs on Chinese goods further exacerbated pressures on the sector, particularly for major mining firms. In contrast, selected companies like DuPont reported strong quarterly earnings, with adjusted earnings per share of $1.13 and an optimistic 2025 outlook.
Real Estate: The composite model increased in March and we are once again adding exposure. Indicators calling relative price trends, 50-day relative breadth, interest rate trends, construction spending, and improving NFIB Small Business Credit Conditions are bullish. Unfortunately, homebuilder sub-industry trends are negative. We are increasing exposure in line with the model.
Commentary: The real estate sector, primarily encompassing real estate investment trusts (REITs) and management firms, faced challenges linked to interest rates and market dynamics, excluding mortgage REITs. In January, rising 10-year Treasury yields at 4.5% heightened concerns about borrowing costs, pressuring REIT valuations as their dividend yields of 3-4% became less attractive compared to safer Treasuries. This held true even with the slight pullback in rates during February. Despite this, industrial REITs like Prologis benefitted from consistent demand for logistics space due to e-commerce expansion. Earnings reports for Q4 2024 revealed a generally stable outlook; approximately 60% of firms exceeded forecasts, particularly in the industrial and multifamily sectors. Prologis likely demonstrated revenue growth, although increasing property maintenance costs may have impacted margins. Conversely, office REITs, such as Boston Properties, may have struggled due to reduced demand from hybrid work models. As nearly $500 billion in commercial real estate loans are set to mature in 2025, refinancing at higher rates poses risks for leveraged REITs. Despite these pressures, the sector saw modest gains supported by industrial and multifamily strengths amid ongoing headwinds in office and retail spaces.
Utilities: Our sector composite improved again in March, and we remain overweight. Measures calling trend, momentum, overbought/oversold, deviation from trend, breadth, earnings yield, U.S. capacity utilization, and dividend yield are bullish. The main negative is the weakening U.S. manufacturing PMI level. Overall, we remain overweight.
Commentary: The utilities sector, which includes electric, gas, water, and multi-utilities, has responded to various factors such as rising energy demand, regulatory changes, and economic conditions. A significant driver of electricity demand has been the rise of AI data centers and overall electrification trends. Companies like NextEra Energy, through its subsidiary Florida Power & Light, have been well-positioned to meet this increasing demand. As a result, electric utilities generally reported improved load growth forecasts, bolstering their revenue streams. Conversely, natural gas utilities like Atmos Energy faced challenges due to lower demand from milder winter conditions, although they benefitted from stable regulated returns. Earnings reports from Q4 2024 revealed robust growth, with around 65% of utilities exceeding estimates, while NextEra likely reported double-digit earnings increases fueled by renewable energy projects. However, independent power producers such as Vistra struggled, with earnings potentially declining by 10-15% due to fluctuating wholesale prices. Factors like regulatory uncertainty, high debt levels exceeding 5x EBITDA, and inflation at 3.2% also impacted sector stability.
Turning to technicals for a moment, as you might expect, sentiment is extremely bearish, and markets are oversold short-term. We expect an oversold bounce. However, if our Catastrophic Stop model turns negative, we will quickly raise cash.
Figure 8: Sentiment is extremely pessimistic. A reversal from these extreme levels would be bullish. Then, we will look to our intermediate-term indicators for signs that breadth is improving.
The S&P 500 10-day rate of change indicator is nearing an oversold buy signal. While this is only one of many we use, it has done a good job of identifying short-term lows.
Figure 9: Short-term oversold conditions in place. If we don’t see a reversal soon, these indicators will likely give way to our intermediate-term measures.
Credit spreads are supportive, indicating that fixed-income investors aren’t anticipating a major financial dislocation.
Figure 10: Credit spreads (OAS) are constructive for equities. It would be bearish if the measures below start to move above their respective means. To be clear, that’s not the case at this point.
As expected, the Momentum Reversal indicator shifted from bullish to neutral. However, the interesting point is that it is now set up for a new buy signal once the smoothed rate of change indicator (orange) reverses back above the lower bracket. We’re watching closely.
Figure 11: Looking for momentum to reverse.
Bottom Line: Economic activity is slowing in the U.S. and abroad. However, growth is still modestly positive and expected to continue higher for the year. Inflation concerns have increased, but the weight of the evidence shows that inflation pressures are still rated neutral. The recent outperformance of U.S. Treasuries confirms that view. Nonetheless, our sector investment models have shifted toward defense over the past few months, providing some volatility relief. If the Catastrophic Stop turns negative, we will immediately raise cash.
This strategy utilizes measures of price, valuation, economic trends, monetary liquidity, and market sentiment to make objective, unemotional, rational decisions about how much capital to place at risk and where to place that capital.
If you would like to discuss any of the above or our approach to investing in more detail, please don’t hesitate to schedule a call or webinar. Please call Tyler Hagan at 941-330-1702 to arrange a convenient time.
I hope you have a wonderful week,
Sincerely,
Donald L. Hagan, CFA
Chief Investment Strategist, Partner, Co-Founder
Charts with models and return information use indices for performance testing to extend the model histories, and they should be considered hypothetical. Charts courtesy Ned Davis Research (NDR). © Copyright 2025 NDR, Inc. Further distribution is prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers, refer to www.ndr.com/vendorinfo.
Disclosures
S&P 500 Index – An unmanaged composite of 500 large capitalization companies. This index is widely used by professional investors as a performance benchmark for large-cap stocks.
S&P 500 Total Return Index – An unmanaged composite of 500 large capitalization companies. This index is widely used by professional investors as a performance benchmark for large-cap stocks. This index assumes reinvestment of dividends.
Sentiment – Market sentiment is the current attitude of investors overall regarding a company, a sector, or the financial market as a whole.
S&P 500 Consumer Discretionary – Comprises those companies included in the S&P 500 that are classified as members of the GICS consumer discretionary sector.
S&P 500 Consumer Staples – Comprises those companies included in the S&P 500 that are classified as members of the GICS® Consumer staples sector.
S&P 500 Communication Services - Comprises those companies included in the S&P 500 that are classified as members of the GICS® communication services sector.
S&P 500 Healthcare - Comprises those companies included in the S&P 500 that are classified as members of the GICS® health care sector.
S&P 500 Industrials - Comprises those companies included in the S&P 500 that are classified as members of the GICS® industrials sector.
S&P 500 Information Technology – Comprised of those companies included in the S&P 500 that are classified as members of the GICS information technology sector.
S&P 500 Materials - Comprises those companies included in the S&P 500 that are classified as members of the GICS® materials sector.
Option Adjusted Spread (OAS) - The measurement of the spread of a fixed-income security rate and the risk-free rate of return (the theoretical rate of return of an investment with zero risk), which is then adjusted to take into account an embedded option.
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