Day Hagan Catastrophic Stop Update September 24, 2024
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Catastrophic Stop Update
TheThe Catastrophic Stop model is unchanged this week at 65.7%. The Internal Composite is bullish, and the External Composite is neutral.
Figure 1: The Catastrophic Stop model continues to support a fully invested position. With the S&P 500 at all-time highs, the model has correctly maintained a risk-on stance for all of 2024.
Recent economic releases continue to support our view that global economic growth is decelerating but still positive. The S&P Global Purchasing Managers Composite remains in expansion territory, but the Manufacturing component is weakening. For Q4, market expectations are for a slower economic expansion.
Figure 2: Global PMIs.
Figure 3: In the U.S., Services are holding up while Manufacturing is stalling. A strike by port workers (along with already-striking Boeing employees) would exacerbate the problem.
Nonetheless, models calling overall economic growth and inflation trends in the U.S. remain supportive.
Figure 4: The Atlanta Fed GDPNow Model indicates a slight increase from Q2 to Q3 (values show the annualized growth rate expectations for real GDP). Q4 is a wildcard with the upcoming election and Fed decisions, but most estimates we’re seeing are in the 1% range.
Inflation trends are heading in the right direction – lower.
Figure 5: This 22-indicator model, tracking measures of commodity prices, producer prices, and industrial production, indicates “Moderate Disinflation.”
Figure 6: 5-year implied forward inflation is 2.3%, while the 10-year implied forward inflation is 2.5%. Both are near their respective 21-year means.
We haven’t featured this table in a while. It illustrates annualized returns for several asset classes during different growth/inflation regimes since 1972.
Figure 7: Historically, when Growth was rising and Inflation Neutral (green highlight), equity returns have been good—16.9% GPA. Even if growth declined to “Growth Stable” and Inflation remained Neutral, the GPA was 13.8%.
China’s overnight gains (over 4%--the best in two years) are in response to several recently enacted stimulus measures. Included are the PBOC's commitment to cut the reserve requirement by 50 bps before year-end and a reduction in lending rates.
Figure 8: China needed to do something. Economic models and indicators are flashing “High Recession Risk” signals, and real estate values are still plummeting. Note that it has typically been a good time to own Chinese equities when the model below starts to reverse back below 70. A more stable China would be positive for U.S. financial assets. Note that the election is also a factor here, with both candidates putting forth more punitive tariff plans.
Figure 9: China’s Forward P/E is 9.1x, at the lower end of the 22-year range. The point is that there is some pessimism already in equity pricing.
The Fed’s 50-bps cut was within the range of expectations. The chart below shows that current rate cut expectations (dark blue line) have shifted from 10 days ago (orange line), but the expected rate 8+ months out hasn’t budged. Investors are still looking for 3% levels in 10 months or so.
Figure 10: Investors now expect a quicker pace of rate cuts initially. However, the endpoint is virtually unchanged from 10 days ago. (Rate expectations are lower than one month ago.) Overall, the Fed is past peak hawkishness, which is constructive. However, the Fed isn’t quite our friend—more like a casual acquaintance.
Bottom Line: Our models remain supportive, with U.S. equities near all-time highs. Yes, there are concerns, but at this point, our models' collective message is that the uptrend is intact.
Our goal is to stay on the right side of the prevailing trend, introducing risk management when conditions deteriorate. As has been the case for all of 2024, the broader-based composite models calling U.S. economic growth, international economic growth, inflation trends, liquidity, and equity demand remain constructive. The Catastrophic Stop model is positive, and we are aligned with the message. If our models shift to bearish levels, we will 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.
Additional Chart of Interest
PS: Sentiment is still in the neutral zone.
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 2024 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.
Price-to-earnings (P/E) ratio – A valuation metric that compares a company’s stock price to its earnings per share (EPS) to determine if a stock is expensive or cheap. It’s calculated by dividing the current stock price by the EPS, which is calculated by dividing the last 12 months of earnings by the weighted average shares outstanding.
Fed Fund Futures Curve – Fed Fund futures contracts are based on the federal funds rate and traded on the Chicago Mercantile Exchange (CME). Fed Funds futures are often used by banks and portfolio managers with the goal of hedging against inflation in a short-term market. The future curve is the graphical representation of the relationship between the price of forward contracts and the time to maturity of the contracts.
Purchasing Manager Indexes (PMI) – Is a measure of the prevailing direction of economic trends in manufacturing.
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There is no guarantee that any investment strategy will achieve its objectives, generate dividends, or avoid losses.
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