Knowledge Tree
economic regimes
Also known as: economic regime
Facts (12)
Sources
Mapping Asset Returns to Economic Regimes: A Practical Investor's ... insight.factset.com Sep 9, 2025 12 facts
measurementThe performance gap between cyclical and defensive equities is asymmetric across economic regimes: the return differential is +1.9% per month in 'Growing' regimes, +0.9% in 'Heating' regimes, and -1.4% in 'Stagflation' regimes.
claimIn 'Heating' economic regimes, asset returns often revert to long-term means because demand growth collides with real-world supply constraints.
claimIvan Vratzov asserts that institutional and wealth managers can improve investment strategies by moving beyond conventional historical risk and return assessments toward a macro-aware perspective that organizes market history into distinct economic regimes defined by growth and inflation.
claimThe economic regime definitions used in the FactSet article are applied in a broad semantic way to distinguish between four different states of the economy based on macro factors, rather than loading narrowly on specific economic meanings accepted by particular investment communities.
claimAsset class outperformance is typically clustered within specific economic regimes, and the risk of significant underperformance remains present in all environments.
measurementThe most frequent transitions between economic regimes are Stagflation to Slowing (18%), Growing to Heating (17%), Heating to Growing (15%), and Slowing to Stagflation (14%).
claimIncorporating economic regime signals allows investors to respond more strategically to changing market conditions and build portfolios with greater long-term resilience.
measurementThe probability of remaining in the same economic regime for the average duration of four months is 75%.
procedureThe regime-based investment approach involves sorting historical market data into a manageable set of qualitatively different economic regimes defined by core drivers like growth and inflation, rooting the analysis in fundamental macro factors, and evaluating how broad asset classes behave within those regimes to inform portfolio construction and risk management.
measurementCash maintains a Sharpe ratio above 1 in almost every economic regime except 'Heating', providing modest but stable returns.
measurementThe average duration of economic regimes in the empirical model is approximately four months, with specific averages of 4.7 months for 'Growing,' 4.5 months for 'Stagflation,' 3.6 months for 'Slowing,' and 3.5 months for 'Heating.'
claimHigh yield credit returns are flat to negative during 'Slowing' and 'Stagflation' economic regimes.