You will be able to place the economy in a growth and inflation regime and name the assets that have tended to suit it.
Every morning Marcus's news feed offers him a new reason to worry: a weak jobs report, a hot inflation print, a central banker's speech. Each headline seems to call for a different move. What he lacks is a frame that sorts all of it into a few states of the world, each with a rough idea of which assets have tended to do well or badly. Analysts use a simple one, and it starts with two questions.
Is economic growth speeding up or slowing down? Is inflation rising or falling? Cross the two and you get four broad regimes.
Rising growth with stable or falling inflation is the good one: companies sell more, costs stay under control and central banks have no reason to push rates up hard. Rising growth with rising inflation is an economy running hot, where demand outruns supply and central banks start to lean against it. Falling growth with falling inflation is a slowdown or recession, where demand weakens, prices cool and central banks cut. Falling growth with rising inflation is stagflation, usually caused by a supply shock that pushes prices up while squeezing activity.
The direction matters more than the level. An economy growing at 3% and slowing is in a different regime from one growing at 1% and accelerating, even though the first has the higher number. Markets react to change, so the regime is about change.
These are tendencies from past decades, not rules, and each regime has had exceptions.
Shares have tended to do best when growth is rising and inflation is stable. Earnings grow and interest rates don't rise fast enough to offset them. Long stretches of the 1990s and the decade after 2009 looked like this, and shares did well through most of both.
High-quality government bonds have tended to do best when both growth and inflation are falling. Central banks cut rates, bond yields fall and bond prices rise, while shares struggle with falling earnings. In late 2008 and early 2020, US government bonds rose while shares fell sharply.
Rising inflation has generally favoured assets tied to real things: commodities, and inflation-linked bonds such as US TIPS, which lesson 3.3 covers. When growth is also strong, shares of companies that can raise prices have often held up too.
Falling growth with rising inflation has been hard for shares and bonds at the same time, and that's what makes it dangerous for a typical portfolio. Shares fall because earnings weaken and discount rates rise. Bonds fall because inflation erodes their fixed payments and central banks raise rates instead of cutting.
The 1970s are the classic case. The oil shocks of 1973 and 1979 pushed inflation into double digits in the US while growth stalled, and both shares and bonds lost money after inflation over much of the decade. 2022 was a milder version: inflation rose to levels not seen in decades, central banks raised rates quickly as growth slowed, and global shares and bonds both fell in the same calendar year. Lesson 2.4, Beta, correlation and why diversification shrinks in a crisis, described what that did to portfolios that counted on bonds to cushion shares.
For Marcus's 80/20 portfolio, this is the regime to think about hardest, because his 20% in bonds offers least protection exactly then.
Here's the catch. Regimes are obvious looking back and hard to call at the time. Growth data such as GDP arrives months late and gets revised, as How the economy hits your wallet: rates, inflation and cycles explains in lesson 4.2, Indicators to watch: GDP, hiring, inflation and the yield curve. Inflation can turn quickly. By the time the data confirms a regime, markets have usually priced much of it.
So don't use the four regimes to forecast. Use them to organise scenarios. Instead of asking "which regime are we in, so what should I buy?", ask "if we moved into each regime, what would happen to my holdings, and could I live with it?" Lesson 3.8, Write a macro dashboard and three scenarios, turns this into a written page.
To place the economy in a regime, look at a few indicators for direction over the past several months. For growth: GDP growth, a purchasing managers' index (Singapore's is published by the Singapore Institute of Purchasing and Materials Management) and employment data. For inflation: headline and core consumer price inflation. Check the latest releases from the official sources rather than trusting a headline's summary.
When Marcus did this, two of his growth indicators pointed down and inflation was easing, which looked like a slowdown. But hiring data was still firm, which argued against it. Holding both views at once is normal. Write down your own regime call, with the evidence for it and the one piece of data that cuts against it.
Write down which regime you think the economy is in now, the two data points that support it, and one that argues against it.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).