Beyond Bulls & Bears


Alternative Allocations: Navigating through economic regimes

Certain asset classes thrive or lag as economies move through one cycle to the next. Franklin Templeton Institute’s Tony Davidow shares how to analyze different economic indicators and how asset classes perform through economic regime changes.

In the last several years, we have experienced the longest equity bull market in history, a global pandemic and the highest level of inflation since the 1980s. And since March 2022, the US Federal Reserve (Fed) has raised interest rates 525 basis points (5.25%). Throughout this period, we have seen a natural rotation of leading and lagging asset classes as we’ve moved from one economic regime to the next.

We recognize the difficulty in trying to time the market—but also accept that certain environments reward assets classes while punishing others, only to reverse course as we move through economic and market cycles. As the exhibit below illustrates, economic cycles follow a path of inflation rising, economic growth weakening, inflation falling and economic growth recovering—and there are certain asset classes that thrive as we move through these cycles.

For example, as the economy recovers, private equity and growth stocks do better; and as economic growth weakens, fixed income and private credit do better. Intuitively, we can all agree that equities outperform in “risk-on” environments, and fixed income does better in “risk-off” environments. However, there are often mixed signals, where some indicators are positive, while others are negative.

Regime-based analysis

To help advisors in evaluating these mixed signals, we built a proprietary dashboard of 15 independent economic indicators, including Purchasing Managers Index (PMI), Leading Economic Indicators (LEI), forward earnings-per-share (EPS), credit spreads, inflation and geopolitical risks, among others. We determine whether the majority of the indicators are positive, negative or neutral. We treat each indicator as being equally relevant.

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As the dashboard illustrates, the majority of the economic indicators were signaling a “risk-on” environment for most of 2021, before switching to a “risk-off” environment through most of 2022. Not surprisingly, the indicators have been mixed throughout 2023, moving from “neutral” to “risk-off” after the Silicon Valley Bank collapse, and then back to “neutral.” We’ll likely return to this in the future to gather additional insights.

Using regime-based analysis

We are not suggesting trying to time the market—but rather illustrating the nature of asset class results across regimes. Whether or not you incorporate the regime-based model for tactical positioning, the economic indicator dashboard may be a useful tool in discussing the prevailing market conditions with clients. The regime analysis can also help you to frame discussions. Understanding how the various asset classes perform across regimes can be helpful in putting capital to work and/or conducting quarterly reviews with clients.

Note, we view alternatives as long-term investments, and would not suggest trying to be tactical with these illiquid assets. Advisors may choose to be tactical with their liquid investments—traditional stocks and bonds. To learn more about regime-based analysis, and the valuable role that alternatives can play in client portfolios, please visit our site or follow me on LinkedIn.


All investments involve risks, including possible loss of principal. Equity securities are subject to price fluctuation and possible loss of principal. Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

Alternative strategies may be exposed to potentially significant fluctuations in value.

Privately held companies present certain challenges and involve incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity.


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