4/3/25
This page is being updated on April 3, 2025, following the U.S. tariff announcements.

The original blog and video from March 2, 2025, is at the bottom of this post.

4/3/25
Following the U.S. tariff announcements yesterday, which came in higher than forecast, we expect that the markets will continue to rotate into defensive stocks and sectors and out of many cyclicals, high valuation stocks and high beta tech. We don’t expect these to be straight line moves, but this tariff cycle could take some time to develop. I am moving our economic slowdown/recession probability in 2025 up to 50%, from 30%.  In this environment, I would expect lower volatility and traditional defensive sectors to outperform (consumer staples, traditional utilities, telecommunication services, and lower volatility healthcare).

Note: This is based on currently available data. If there is a major change in the tariff outlook or narrative, these views could change quickly. Also, markets are trading in very wide ranges. Higher volatility in almost all charts is expected currently.

Gold: From a fundamental view, we expect Gold to remain a beneficiary of global macro uncertainty from a potential tariff trade war. On a technical level, Gold is in a confirmed uptrend, and it is constructive here and on pullbacks. This is a high conviction idea.

Bonds: We expect a notable slowdown in the U.S. economy in 2025, from tariff related concerns. Also, large cuts in U.S. government jobs and large cuts in U.S. government spending. Bonds have not yet broken out in 2025, due to inflation concerns from tariffs, but we expect that they will start to break out shortly. This is a medium conviction idea.

Overweight sectors:
Low volatility, low valuation and/or high dividend
Consumer staples
Traditional utilities
Telecommunication services
Insurance
Lower Volatility healthcare
Gold

Underweight sectors:
High valuation and high beta growth stocks
Technology
Banks
Traditional cyclicals (industrials and consumer discretionary)
Speculative growth stocks

Updated defensive ideas tracking list
ALL, BMY, BRK/B, BTI, CAH, CCEP, CNP, COR, EXC, MCK, MO, NVS, PM, T, VZ, WELL
GLD, TLT

ORIGINAL MARCH 2, 2025 POST AND VIDEO IS BELOW
3/2/25

VIDEO: https://bit.ly/BCDDefensiveRotationVideo3225

Note: This blog and video discusses the recent market rotation into bonds and traditional defensive sectors in the stock market. There is no assurance on our end that this rotation will continue, but it is something that investors should be aware of and should prepare for, in the event that it does follow through. We saw a similar defensive rotation in mid 2024 that did not follow through.

We have gradually increased defensive and/or lower valuation positions over the past two weeks, and we could raise that exposure if the rotation continues.

WATCH INCOMING DATA

• If incoming economic data and/or labor market data weakens, then we would expect the recent defensive rotation to continue.
• Conversely, if incoming economic data and/or labor market data comes in above forecast, markets could reverse some or all of this rotation.
• We do not have a prediction on the incoming data. Our specialty is the technical analysis of market trends, but not economic forecasting.

Over the past 7 weeks, there has been a defensive rotation in the markets, highlighted by four keys factors:

1. 10-year US Treasury Yields (TNX) pulled back by 59 basis points, from a recent peak at 4.80 on January 14, to a recent low point of 4.214 on February 28. TNX closed at 4.231 on Friday, – 57 basis points from the recent high.  

• Bond yields tend to trade lower either when inflation expectations come down and/or economic growth expectations slow down.
• The fact that yields have pulled back after a higher than forecast CPI report in February tells us that there are economic growth concerns.

2. Bond prices are rising.

• iShares 20+ year Treasury Bond ETF (TLT) is +9.26% over the last over the last 7 weeks.
• Bonds move in the opposite direction of bond yields, so this over is directly tied to the pullback in bond yields.
• Bonds are considered a “safe haven” in times of an economic slowdown.

3. Defensive sectors in the stock market are outperforming.

• Defensive sectors are considered more reliable in terms of sales and earnings growth and are considered less reliant on the overall economy.
• Defensive sectors are considered to be consumer staples, healthcare, real estate and traditional utilities. Telecommuncation services stocks, discount retailers and insurance stocks are often considered defensive as well.
• The market generally takes the view that if the economy and/or payrolls market weakens considerably, consumer may delay the purchase of a new home or a new car, but they will continue to buy groceries, pay their electricity bills and auto insurance, and continue to get healthcare.
• Cyclical sectors (often tied to economic growth) could underperform. These sectors include industrials, financials, including banks, consumer discretionary, energy and small cap stocks.

4. Low valuation stocks, lower volatility stocks and/or high dividend stocks also tend to perform well in defensive rotations. Low price-to-earnings (PE) ratio stocks often see less valuation compression in slowdowns and high dividends are considered an attractive part of an overall total return.

Returns since the January 13/January 14, 2025, inflection point:
CBOE 10-year UST Yields (TNX) -57 basis points
iShares 20+ year Treasury bond ETF +9.28%
S&P 500 ETF (SPY) +3.27%
Nasdaq 100 ETF (QQQ) +1.69%
SPDR Real Estate ETF (XLRE) +10.49%
SPDR Consumer Staples ETF (XLP) +9.60%
Invesco S&P High Dividend Low Volatility ETF (SPHD) + 8.13%
SPDR Utilities ETF (XLU) +7.86%
SPDR Healthcare ETF (XLV) +7.23%

The above noted charts are shown below, from the beginning of 2025 through Friday’s close.

Select defensive sector ideas: