Investment Clock : What Time Is It ?

Pursuant to my previous blog post about market cycles and “4 Seasons Investing “, there is another way of explaining the market cycles i.e “ Investment Clock “.

The idea of an investment clock has been around for decades and it captures two very important things in investment :  

1) Business and Market move in a cycle 

2) No sector or asset class exist in isolation or can sustain without being affected by business cycles.

Below quoted from “Fidelity International“ should give you a very good understanding of Investment Clock Vs Market Cycle.

What is Investment Clock?

Different asset classes and business sectors tend to perform better than others at different phases of the economic cycle. The Investment Clock shows which asset classes and stock sectors have historically outperformed in each phase of the economic cycle according to our research. The model was created by Fidelity to guide asset allocation in funds, and is not intended as a tool to predict which asset classes or stock sectors are likely to outperform in any given economic phase.

image credit toFidelity Investment via movevator.com

The Investment Clock separates the economic cycle into four phases based on the strength of economic growth and inflation. In the Reflation phase, economic growth is weak, while declining commodity prices and spare capacity causes inflation to fall. 

In the Recovery phase, economic growth begins to pick up as efforts by governments to stimulate the economy take effect, but inflation continues to fall. In the Overheat phase, economic growth is strong and inflation climbs as companies run out of capacity, prompting governments to introduce measures to cool the economy. And lastly, in the Stagflation phase, GDP growth falls but inflation continues to rise as workers demand pay rises above the cost of living and companies raise prices to protect margins.

How different asset classes perform during the economic cycle

As the economy moves through its cycle, Fidelity uses the Investment Clock to re-balance asset allocation in favour of the asset class most likely to outperform based on historical research. Typically, bonds outperform during the Reflation phase when governments tend to lower interest rates to stimulate economic growth, stocks outperform during the Recovery phase and commodities during the Overheat phase as investors become risk-seeking, and finally, cash tends to be the best performer during the Stagflation phase when weak economic growth or recession tends to cause prices of other assets to fall.

How different stock sectors perform during the economic cycle

In addition, the economic cycle also influences how different sectors of the stock market perform. In the Reflation phase, for example, the top three performing sectors are historically consumer staples, financials and consumer discretionary stocks. In the Recovery phase, consumer discretionary, telecom and technology stocks take over leadership. In the Recovery phase, technology, industrial and energy stocks perform best. And lastly, energy, pharmaceutical and utility stocks outperform during the Stagflation phase.

What the Investment Clock means to you

For ordinary investors following a long-term investment plan, what the Investment Clock shows are the importance of creating a diversified investment portfolio. As different asset classes and business sectors take over leadership during the economic cycle, investors need to maintain a diversified range of investments to capture their growth potential and maximize returns.

What Time is it?

When you Google “ Investment Clock “, you may find thousands of images and allow me to just share few of them :

<Image credit to monevator.com>

When we look at the clock hanging on the wall, we will be telling the same time when people asking us  “ what is the time now ? “, but for “investment clock”, we will surely get different answers, depending on individual’s perception on the hour hand pointing towards which market cycle are we in right now.

I think the investment clock concept is useful in understanding how economies relate to each asset classes and also doing the portfolio re-balancing from time to time in a different market cycle.

But the challenge is, as above mentioned, we may have different answers of “ What is the time? “

Cheers !!

STE

Quote Of The Day:

" The stock market is the story of cycles and of the human behaviour that is responsible for overreactions in both directions." by Seth Klarman