How Asset Classes Perform During the Business Cycle

Using historical data, we determine what phase of the business cycle, or macro regime, we’re in based on the most recent level and change in our leading indicator, relying only on information that’s available at the time.

Historical analysis of the last 45 years shows that asset returns vary significantly between regimes, with major implications for asset allocation decisions. Here’s a summary of our findings.


  • Recovery
    Risky assets perform remarkably well and investors are compensated for taking on additional risk in this macro regime. Both equities and credit outperform government bonds. High yield credit outperforms investment grade and delivers the best total returns as an asset class, often outperforming equities. Government bonds provide attractive returns over cash, since inflation is still falling and monetary policy is in its final easing stage.
  • Expansion
    Equities are the best-performing asset class in this phase, often benefitting from the sustained acceleration in economic momentum that translates into rapid earnings growth and an expansion in profit margins. Credit markets are now mainly an income proposition. High yield still outperforms investment grade, while due to rising inflation and tightening monetary policy, government bonds are the worst-performing asset class.
  • Slowdown
    This phase is the most uncertain for asset allocation decisions. Equity, credit and government bond markets all deliver similar performance that’s broadly in line with cash yields, which at this stage have risen due to cumulative policy tightening. Once volatility is factored in, this macro regime offers unattractive risk-adjust returns, which points to a neutral asset allocation stance.
  • Contraction
    Government bonds are the best-performing asset class, supported by severe risk aversion, falling inflation and aggressive monetary policy easing. In this environment, the most appropriate asset allocation strategy is to reduce risk by underweighting exposures to equities and credit, and overweighting high quality government bonds.

It is also important to note that while our macro regimes framework is a very significant and powerful input to our investment process, we do not rely on it on a standalone basis. We combine macro analysis with market indicators to assess valuation and momentum, and use risk measures to assess volatility and the credit cycle.

To learn more, download our full paper on dynamic asset allocation.