Day Hagan Smart Sector® with Catastrophic Stop Strategy Update April 2025
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Executive Summary
The U.S. stock market experienced significant volatility last month, primarily due to trade policy uncertainty and mixed economic signals. The re-elected Trump administration’s aggressive tariff proposals, including potential hikes on imports from key trading partners such as China, Mexico, and Canada, have eroded investor confidence. Concerns about an impending trade war have particularly affected export-heavy sectors, such as manufacturing and technology, contributing to a decline of over 4% in the S&P 500 year-to-date.
Economic indicators have further added to this uncertainty. The March Consumer Price Index (CPI) reflected inflation holding steady at 2.9%, surpassing the Federal Reserve’s target of 2%, which dampens expectations for aggressive interest rate cuts. Minutes from the Fed’s March 19-20 meeting indicated a cautious approach, maintaining the federal funds rate between 4.25% and 4.50%. This decision underscores inflationary pressures stemming from potential tariffs and strong wage growth, which remains around 4%. The Atlanta Fed’s GDPNow model, updated on April 1, forecasts an annualized GDP decline of 1.4% for Q1 2025 (adjusted for gold imports), due to increased imports ahead of tariff deadlines, although consumer spending has shown resilience.
Investor sentiment has shifted towards a more defensive posture, moving away from tech mega caps—Nvidia, for instance, is down 12% year-to-date—into sectors like bonds and utilities, reflecting growing recession fears. Despite these challenges, some analysts maintain a level of optimism, citing anticipated deregulation and tax cuts that may bolster corporate earnings later in the year.
In March, the Federal Reserve confirmed its decision to keep interest rates steady at 4.25%-4.5%, marking a pause in the rate-cutting cycle. The Federal Open Market Committee (FOMC) anticipates a 50-basis-point reduction in interest rates later this year, despite the uncertain economic outlook. GDP growth forecasts for 2025 have been revised downward to 1.7%, while estimates for Personal Consumption Expenditures (PCE) inflation have been increased to 2.7%. Additionally, the unemployment rate is projected to rise slightly to 4.4%.
In trade developments, a new round of tariffs is set to take effect on April 2, including a 25% levy on auto imports, which raises further concerns over economic impacts. The S&P Global U.S. Manufacturing Purchasing Managers’ Index (PMI) fell to 49.8, indicating contraction, while the Services PMI improved to a three-month high of 54.3. Despite a minor improvement in employment figures in April, job growth continues to be sluggish. Input costs have surged to an 18-month high, while confidence in the service sector declined amid fears related to federal spending cuts and broader economic policy.
Looking ahead, April will bring critical policy shifts, such as the reimplementation of reciprocal tariffs and a tapering of the Fed’s quantitative tightening (QT) strategy. The Fed is expected to slow the pace of its balance sheet runoff, with rates strategists predicting that QT—which entails allowing bonds to mature without reinvesting proceeds—will conclude by the end of 2025.
As the first quarter of 2025 draws to a close, earnings reports are coming into focus, although estimates continue to decline. According to FactSet, 107 S&P 500 companies have issued earnings-per-share guidance for Q1 2025. Out of these, 68 companies have issued negative guidance, significantly surpassing the 5-year average of 57, while only 39 have issued positive guidance. Consequently, 64% of companies offering guidance for Q1 reported negative expectations, which is also above historical averages. The current trajectory of earnings resembles past periods where earnings revisions decreased without a recession occurring within the subsequent year. Should earnings estimates fall considerably, the probability of a recession could increase. This earnings downturn may largely stem from the prevailing high level of uncertainty surrounding government policies. Analysts often factor probabilities into their models, and as the likelihood of adverse outcomes rises, it diminishes the chances of favorable results. Historically, persistent policy uncertainty has been linked with extended market declines. Notably, the Economic Policy Uncertainty Index—a GDP-weighted average of 20 countries—reveals that many nations currently lack a well-defined path for fiscal, monetary, and legislative policies. Alleviating such ambiguity should provide support for equities.
In summary, the market’s trajectory remains largely influenced by trade tensions, mixed economic indicators, and shifting investor sentiment. While some analysts express optimism regarding potential economic boosts from deregulation and tax policies, the current climate of uncertainty poses significant risks for market stability and growth.
Holdings
Sector
Consumer Discretionary
Consumer Staples
Communication Services
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Real Estate
Utilities
Outlook (relative to benchmark weighting)
Neutral
Neutral
Neutral
Neutral
Neutral
Neutral
Neutral
Underweight
Neutral
Neutral
Overweight
Sector Review
Consumer Discretionary: The Consumer Discretionary composite model remains at the low end of its 5-year range. Measures of trend, deviation from trend, momentum, overbought/oversold, breadth, and fixed-income trends are negative. The few bright spots are valuations moving toward more historically neutral levels (on a relative basis), Consumer Credit balances increasing, and Housing Starts remaining constructive. We remain neutral, modestly below the benchmark allocation.
Commentary: In March, the U.S. Consumer Discretionary sector encountered significant performance challenges. President Trump’s announcement of new trade tariffs notably impacted the sector, raising concerns over increased costs for consumer goods and potential retaliatory measures from affected countries. This situation created uncertainty within the market, particularly for retailers and car manufacturers. Concurrently, consumer confidence has weakened, as evidenced by a decline in the Conference Board’s consumer confidence index. This drop indicated a growing pessimism about economic conditions, leading consumers to potentially reduce discretionary spending. Rising inflation also emerged as a concern, with expectations of further price increases linked to the tariffs, eroding purchasing power and influencing spending habits. Although some sectors reported increased consumer spending, broader trends pointed towards caution, as economic uncertainties and inflation expectations grew.
Consumer Staples: The composite model remains neutral, with measures of trend, relative price momentum, relative short interest, food inflation (pricing power for the companies), and valuations bearish. Positive indicators include relative oversold measures, net new highs, strong breadth, and supportive financial conditions (based on the Chicago Fed’s National Financial Conditions index). The weight of the evidence signals a neutral allocation.
Commentary: Costco Wholesale Corporation reported its second-quarter earnings, showing a year-over-year increase in earnings, but slightly falling short of analysts’ expectations. Despite robust sales figures and strong e-commerce growth, the stock declined after the announcement, reflecting investor concerns. Walmart Inc. demonstrated resilience in its fiscal fourth-quarter report, highlighting its ability to adapt to economic challenges. The Coca-Cola Company is expected to release its earnings report at the end of April. Amid ongoing market volatility and economic uncertainties, investors are leaning towards defensive sectors like consumer staples, which have continued outperforming the broader market. Additionally, inflation has driven consumers to become more price-sensitive, affecting their purchasing behavior. This has led retailers to emphasize a cautious approach in consumer spending.
Communication Services: The composite model remained neutral, with mixed technical and fundamental indicators. Valuations and short-term trend and yield curve trend indicators are supportive, while short-term overbought indicators are headwinds. We remain neutral.
Commentary: Major companies like Meta Platforms, Netflix, and Alphabet reported earnings that surpassed expectations, driven primarily by advancements in artificial intelligence and digital services. However, concerns about the strengthening U.S. dollar impacted revenue projections for many firms, particularly those with substantial international operations. Regulatory scrutiny around data privacy and antitrust issues added uncertainty to the sector, prompting companies to reassess operational strategies. Additionally, the competitive landscape intensified, particularly in streaming services and digital advertising, requiring firms to innovate continually to meet evolving consumer demands. Investments in technology, especially AI, remain a focus for enhancing user experience and operational efficiency, though they introduce considerable short-term costs.
Energy: The composite model remains neutral. Measures of volatility, breadth, trend, cash flow generation, and futures pricing are negative. Bullish supports include recent relative strength improvement, flat rig count growth over the past five months, and YTD weakness in the U.S. dollar.
Commentary: Earnings reports from major companies such as Exxon Mobil, Chevron, ConocoPhillips, and The Williams Companies were mixed. Exxon Mobil reported a significant profit increase in the fourth quarter of 2024, driven by higher oil and gas production from key regions. However, its refining segment faced challenges due to increased global supply and diminished demand. Chevron also saw a rise in net income but experienced its first quarterly refining loss in four years, attributed to lower margins and higher costs, despite achieving record production levels. Overall, the energy sector navigated headwinds from lower oil prices and declining refining margins. Yet, major companies managed record production levels, reflecting a strategic focus on enhancing their upstream operations in response to downstream difficulties.
Financials: The composite model remains neutral. Positive indicators include relative price trends, better downside volatility, U.S. dollar trends, and some recent improvement in the G10 Economic Surprise Index (still slightly negative, but off the worst levels of the year). Measures calling relative OBOS conditions, some widening in credit spreads (particularly High Yield), weaker loan growth, and the narrowing of the yield curve (over the past three months) are negative. We maintain our neutral outlook.
Commentary: The Trump administration’s announcement of new reciprocal tariffs aimed at addressing trade imbalances led to substantial market volatility, raising concerns about persistent inflation and the risk of stagflation, characterized by stagnant growth and rising prices. Concurrently, the administration’s aggressive deregulatory agenda, particularly in the financial sector, garnered support from banking leaders pushing for reduced oversight and modified capital rules, suggesting a shift toward a more lenient regulatory landscape. Consumer confidence, however, declined sharply, reaching its lowest level in two years due to inflation fears and job insecurity, which negatively impacted consumer spending—an essential component of economic growth. The Federal Open Market Committee projected a 2.6% real GDP growth rate for 2025, while flagging risks associated with trade policies and fiscal uncertainties. Major financial institutions showed varying performances; some reported strong earnings driven by investment gains, while others faced challenges amidst fluctuating market trends and shifting consumer behavior, highlighting the complexities of the prevailing economic environment.
Health Care: After last month’s composite model improvement, the model pulled back but remains positive. We are once again adding exposure. Measures of trend, relative strength momentum reversals, relative breadth, pricing power (medical CPI), health care personal expenditures, valuations, and earnings revision breadth are bullish. Indicators calling downside volatility and near-term relative strength momentum are negative. We are neutral.
Commentary: A key issue was the Department of Health and Human Services (HHS) reorganization by the Trump administration, which aimed to streamline operations by reducing divisions and cutting approximately 10,000 jobs. Critics raised concerns regarding the potential impacts on public health services and crisis response capabilities. Simultaneously, new drug pricing policies created uncertainties for pharmaceutical companies, emphasizing transparency and affordability yet posing revenue risks. Economic indicators revealed a slight decline in personal health care spending, alongside notable increases in prescription drug prices, reflecting ongoing cost pressures. Workforce challenges were exacerbated by immigration policies, which intensified existing caregiver shortages, significantly impacting home healthcare. Furthermore, investment (asset flows) in the sector slowed due to political uncertainties and unpredictable economic policies, leading companies to exercise caution in mergers and acquisitions. Amid these challenges, key health care companies, such as Johnson & Johnson and UnitedHealth Group, demonstrated resilience, with analysts noting the sector’s potential as a haven in a tumultuous market.
Industrials: The composite model is mixed, with indicators calling relative momentum, trend, oversold conditions, breadth, commodity price trends, and industrial production at positive levels. Headwinds include valuations (based on cash flow and sales yields), and the U.S. dollar’s longer-term uptrend. The net result is neutral exposure.
Commentary: As discussed in our previous commentaries, trade policies established during President Trump’s administration introduced new tariffs intended to bolster American manufacturing. However, these measures contributed to market volatility and raised concerns about retaliatory actions from trading partners, impacting companies with substantial international exposure. Economic forecasts pointed to a projected GDP growth slowdown, suggesting diminished demand for industrial products, which could affect sector revenues. Industrial production experienced a rise, bolstered by a notable increase in motor vehicle and parts production, indicating resilience in select manufacturing areas. However, this could be short-lived if a trade war breaks out. Corporate earnings reports highlighted mixed performances among key players. Caterpillar experienced a decline in earnings and revenue due to challenges in the construction segment, while RTX Corporation reported growth attributed to robust demand in aerospace. Conversely, Uber Technologies significantly exceeded expectations in its earnings report. Overall, investor sentiment reflected guarded optimism regarding a potential resurgence in U.S. manufacturing.
Information Technology: The composite model has improved with the April update, primarily due to shorter-term relative oversold conditions becoming more extended due to the relative underperformance of the sector this year. Measures of relative short interest ratios and earnings revisions breadth for the sector are also constructive. The recent increases in inflation expectations (near the top end of the five- and 10-year ranges) and longer-term overbought conditions (that are still reversing from the peak) are negative. We remain modestly underweight.
Commentary: Again, trade policies, especially new tariffs introduced by the Trump administration to boost domestic production, contributed to market volatility, notably affecting technology stocks. This uncertainty prompted declines in major indices like the Nasdaq Composite. Furthermore, economic growth projections for the year were revised downward, indicating a GDP growth forecast of 1.7%, which raised concerns over consumer spending and corporate investment crucial for the technology industry. Corporate earnings reports reflected mixed performances. Companies like Apple and Microsoft experienced stock declines, while NVIDIA and Broadcom reported robust fiscal results, with substantial growth in AI-related revenues. Nonetheless, they too were caught up in the selling over the past five weeks due to concerns around over-investment and cheaper competitive offerings. On the other hand, Salesforce saw a sharp stock decrease amid a disappointing fiscal outlook despite efforts in AI initiatives. Overall, while investor interest in artificial intelligence and cloud computing remained strong, uncertainty surrounding trade policies and economic conditions led to increased market volatility, with companies that successfully integrated innovative technologies and showing a path to higher efficiency and profits better positioned to attract investment.
Materials: The Materials sector composite model improved slightly, 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: Copper prices surged due to anticipated tariffs on imports and increased demand from China’s stimulus measures, impacting companies like Freeport-McMoRan Inc. The materials sector struggled due to its sensitivity to global economic conditions and trade uncertainties. Major players, including Linde plc, Sherwin-Williams Company, Air Products and Chemicals Inc., and Ecolab Inc., experienced performance pressures linked to the construction market, industrial demand, and overall economic forecasts. The sector faces potential revenue challenges amid an anticipated economic slowdown. Over the past year, coffee, natural gas, gold, copper, silver, cattle, cocoa, and lumber have outperformed, while OJ, lithium, uranium, and wheat have been under pressure. (Interestingly, lithium prices have gone down 46% over the past year, and Brent crude oil has gone down 9.3%.)
Real Estate: The composite mode held steady in April. Measures of relative price trends, 50-day relative breadth, employment (holding up well), lower rates, industrial production for construction supplies, and NFIB Small Business Credit Conditions are bullish. However, increased downside volatility, weakness in the S&P 500 Homebuilding sub-industry, and the slightly negative Citi Economic Surprise Index are headwinds. We remain neutral.
Commentary: Elevated mortgage rates, hovering around 6% to 7%, continued to challenge housing affordability. However, an increase in home tours and mortgage applications indicated that prospective buyers adapted to these conditions, driven by life events such as family growth or job changes. The S&P CoreLogic Case-Shiller Index recorded a 4.1% annual rise in home prices, with significant regional variations; New York City saw a notable increase, while markets like Tampa experienced declines. The rental market was also under pressure, with median rents for one-bedroom apartments stable at $1,524 and two-bedroom units at $1,905, reflecting a trend toward higher prices due to limited availability and high mortgage rates. Economic growth projections were adjusted downward, indicating potential challenges for consumer spending and real estate investment.
Utilities: Our sector composite declined slightly with the April update, and we are modestly reducing exposure. Measures of trend, OBOS, lower crude prices, the sector’s earnings yield vs. the 10-year Treasury, and the relatively high dividend yield are bullish. Negative indications from short-term relative price momentum (being tangentially related to the Info Tech sector’s fortunes), 50-day relative breadth, and the recent decline in the Manufacturing PMI (flash), are headwinds. We remain overweight but are reducing exposure in line with the model.
Commentary: Earlier in the year, a notable rise in electricity demand was driven by the growing adoption of technology, including artificial intelligence and the expansion of data centers, alongside the electrification of various industries. This trend marked a departure from the minimal growth in electricity demand observed from 2008 to 2023, indicating a pressing need for enhanced investments in generation and infrastructure. In reaction to high natural gas prices, U.S. power companies increased coal-fired power generation. Concurrently, economic indicators reflected concerns about inflation, with the Federal Reserve adjusting its outlook for inflation and GDP growth, raising fears of stagflation. Historically, the Utilities sector has shown resilience during such economic conditions. Still, the previous buildup in capacity and capex spending commitments came under negative scrutiny, causing the sector’s relative strength to stall.
Catastrophic Stop Update
The Catastrophic Stop model combines time-tested, objective indicators designed to identify high-risk periods for the equity market. The model (Figure 1) held steady in March and entered April with a fully invested equity allocation recommendation. Technical measures calling U.S. Stock/Bond Relative Strength, Short-term Trend, Intermediate-term Trend, and High Yield OAS spreads are bearish. Conversely, global breadth statistics, sentiment, measures of economic activity, and equity demand remain bullish. Long-term oversold mean reversion indicators and High Yield/EM Bond breadth are neutral. Our indicators have not yet registered an intermediate-term breadth thrust. Breadth thrust signals don’t necessarily need to occur for the markets to mark a low, but they do increase the probability that a broader-based uptrend will be sustainable.
The weight of the evidence suggests that the current decline is not expected to extend into a significant downtrend. Of course, if our model flips negative (below 40% for two consecutive days), signaling more substantial problems, we will raise cash immediately.
Figure 1: Catastrophic Stop Model vs. S&P 500 Total Return Index
Our goal is to stay on the right side of the prevailing trend, introducing risk management when conditions deteriorate. Currently, the uptrend remains intact. 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 uses 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.
For more information, please contact us at:
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Day Hagan/Ned Davis Research
Smart Sector® With Catastrophic Stop ETF
Symbol: SSUS
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