The CATS portfolio strategy is used to predict the stock performance of industry groups in the aftermath of macroeconomic shocks (tax reform, inflation, trade bills, etc.). Industries are classified into two basic groups—those with high sensitivity to a tax on capital (HC) and those with low sensitivity (LC). Each classification is further divided into two groups—industries that have the stronger attributes of their category (HCI and LCI) and those with the weaker attributes (HCII and LCII).

The market may be divided into cycles according to the impact of a given macroeconomic shock. In high-CATS cycles, HC industries may be expected to outperform the overall market; in a low-CATS cycle, LC industries should outperform the market. Over the 21 years from 1965 through 1985, 41 of the 63 industries classified as HC outperformed the market by a statistically significant amount in high-CATS cycles or underperformed the market by a statistically significant amount in low-CATS cycles. Nineteen of the 35 LC industries had statistically significant results consistent with CATS expectations. Results were even stronger when applied exclusively to the HCI and LCI industries.

Results indicate that differential performance between LC and HC industries tends to hold up even in declining markets. Thus, while the optimal strategy would be to be fully invested in Treasury bills during some cycles, portfolio managers constrained from doing so could still use the CATS strategy to identify industries that are likely to outperform the stock market (if not T-bills).