Analyzing Index performance During Economic Regimes Classified Using CLI and CPI
Blog post
April 18, 2014
Institutional investors are trying to better understand how their portfolios benchmarked to factor indexes may behave in different economic regimes. In previous posts, we tried to answer the question: "I think economic activity/inflation is going to increase/decrease over the near term - how has this historically affected my portfolio?"
But an analysis that would fit better with their views of the world would be to look at variables in conjunction: the Business Cycle and Inflation.
Indeed, when assessing future economic conditions, institutional investors look not only at growth, but also divide growth into "good" and "bad" regimes depending on inflation.
So a more realistic question is: "I think economic growth is going to dip and inflation is going to pick up - what has happened to portfolios like mine under stagflation in the past?"
We try to answer this question by dividing economic regimes into four outcomes, depending on economic strength and whether inflation is rising or falling.
- "Modest Growth" - Rising Growth and Falling Inflation
- "Slow Growth" - Slowing Growth and Falling Inflation
- "Stagflation" - Slowing Growth and Rising Inflation
- "Heating Up" - Rising Growth and Rising Inflation
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