navigating
market cycles
advisors asset management
A tactical guide for strategic portfolio management
See More
Growth
overheating
slows
peak
weakens
very weak
bottom
growing
Growth
- Stock market is performing well, on average
- Businesses increase borrowing; IPOs begin to rise, and banks begin to loosen credit standards
- Consumer confidence trending toward cautious optimism with consumption improving as labor
prospectus improve
- Inflation risk picks up
- The Federal Reserve ("FED") is neutral, watching for signs of inflation
- Credit spreads continue to narrow as investor risk appetite begins to broadly improve
- Yield curve stabilizes and steepens, watching for signs of inflation
- Equity: Dial-up exposure with particular focus on small- and mid-cap, as well as emerging markets.
- Sectors: Consider industrials, materials, commodities, and metals.
- Alternatives: Consider short-term growth notes. May also look to select income notes to potentially
generate enhance yield in a tightening spread environment.
- Fixed Income: Dial-up portfolio credit risk slightly while looking to decrease market risk; begin to
strategically lower duration.
• Consider higher corporate allocation
• Consider lower Treasury and/or agency allocations
MARKET INDICATORS
PORTFOLIO ADJUSTMENT CONSIDERATIONS
ECONOMY IS GROWING
01
Growth
Overheating
Peak
Slows
Weakens
Very Weak
Bottom
Growing
Growth
overheating
slows
Growth
Economy Overheating
02
Overheating
Peak
03
peak
Economy Slows
04
Economy is Weak
05
weakens
Economy is Very Weak
06
very weak
Economy Bottoms
07
bottom
Economic Growth begins
08
growing
Growth
• Yield curve stabilizes and steepens
• Businesses increase borrowing
• Inflation risks picks up
• FED is neutral, watching for signs of inflation
• Yield Curve …. (+)
Common Market Indicators
• EQUITY: Dial-up exposure with particular focus on small- and mid-cap, as well as emerging markets
• SECTORS: Consider industrials, materials, commodities, and metals
• ALTERNATIVES:
• BONDS: Dial-up portfolio credit risk slightly while looking to decrease market risk
- Consider higher corporate allocation
- Consider lower Treasury and/or agency allocations
Potential Portfolio Adjustments
Growth
01
Growth
Growth
overheating
peak
slows
slows
weakens
very weak
bottom
growing
Growth
Growth
Overheating
Growth
- Stock market remains strong, volatility picks up
- Businesses remains strong; aggressively buying materials
- Consumer confidence is relatively high with strong employment and wage growth
- Inflation may begin to accelerate
- The Federal Reserve ("FED") raises interest rates (tightens)
- Credit spreads continue to tighten as investors reach lower into the credit stack to pick up yield
- Yield curve is stable, begins to flatten
MARKET INDICATORS
- Equity: Dial-up mid-cap exposure.
- Sectors: Consider industrials and materials.
- Alternatives: Income notes become potentially more attractive as volaility picks up, particularly
shorter-term.
- Fixed Income: Dial-up portfolio credit risk while looking to decrease market risk (horizon test portfolio);
continue to lower duration.
• Consider increasing exposure to corporates
• Consider moderating expsoure to Treasuries and/or agencies
PORTFOLIO ADJUSTMENT CONSIDERATIONS
- Stock market prices are volatile
- Businesses reexamine their budgets in anticipation of a decline in economic activity
- Consumer confidence at highest level, signaling a peak
- Inflation is rising
- The Federal Reserve ("FED") continues to raise rates and tighten monetary policy or may pause
- Credit spreads uncertain; outlook pauses the tightening of credit spreads as investors become wary of economic outlook
- Yield curve continues to flatten and may invert (short yields rise)
MARKET INDICATORS
- Equity: Dial-up large-cap exposure.
- Sectors: Consider materials, energy and healthcare.
- Alternatives: Consider growth notes with a downside absolute return feature to potentially protect portfolio gains as well as short-term income notes.
- Fixed Income: Spreads between AAA & BBB tighten, incremental yield may be gained by investing in lower-rated
securities; defensive credit exposure.
• Consider dialing down overall corporate exposure
• Consider convexity bonds at a discount
PORTFOLIO ADJUSTMENT CONSIDERATIONS
- Stock market under pressure
- Businesses start coming under pressure; becoming more conservative
- Consumer sentiment becomes more conservative as investors rein in spending and investing
- Inflation peaks
- The Federal Reserve ("FED") pauses or hints at a potential decrease in interest rates
- Credit spreads begin to widen, in general, while riskier credits tend to widen more as capital shifts higher in the credit stack
- Yield curve flattens, may begin to invert; short rates rise and peak; long rates peak and drop
MARKET INDICATORS
- Equity: Continue to dial-up large-cap exposure.
- Sectors: Consider healthcare and consumer staples.
- Alternatives: Look at longer-term income notes to potentially protect individual portfolio positions.
- Fixed Income: Short rates rise and peak; long rates peak and drop; spreads between AAA & BBB begin to widen.
• Consider low coupons at par or discount
• Seek to maximize convexity
PORTFOLIO ADJUSTMENT CONSIDERATIONS
- Stock market declining with prices still under pressure
- Businesses reduce inventory
- Consumer sentiment declining, unemployment rising
- Inflation declines
- The Federal Reserve ("FED") remains neutral, seeks to stimulate growth by lowering interest rates
- Credit spreads continue to widen as investors unwind risk-on positions, driving yields higher while rotating to safer credits
- Yield curve flattens and begins to resemble a more normal curve, steepening as the recession begins to come to fruition in anticipation of FED moves
MARKET INDICATORS
- Equity: Underweight equities.
- Sectors: Consider financials, consumer staples, utilities, and defense companies.
- Alternatives: Continue to look at longer-term income notes as credit spreads widen and volatility increases.
- Fixed Income: Overall bond yields declining; spreads continue to widen; seek call protection.
• Consider overweighting bonds; focusing on lower coupon bonds at par or at a discount
• Actively monitor high yield for entry point
PORTFOLIO ADJUSTMENT CONSIDERATIONS
- Stock market declining, still under pressure
- Businesses continue to reduce inventory; bank credit tightens, making it more difficult to borrow
- Consumer sentiment continuing to decline and unemployment continuing to rise
- Inflation declines, not generally a concern
- The Federal Reserve ("FED") begins lowering rates (or may pause) to stimulate growth
- Credit spreads continue to widen as uncertainty reverberates through risk markets
- Yield curve continues to steepen on the long-end
MARKET INDICATORS
- Equity: Selective equity allocation to get to neutral weighting.
- Sectors: Consider financials, technology, and transportation.
- Alternatives: Long-term growth notes become more attractive with pull-back in asset prices across the markets.
Volatility and spread widening make income notes potentially more attractive for pricing and yield enhancement opportunities.
- Fixed Income: Coupons at market, duration goes to benchmark
• Consider selling high grade credits and increasing par value
• Consider increasing high yield allocation, if appropriate
PORTFOLIO ADJUSTMENT CONSIDERATIONS
- Stock market bottoms
- Businesses and institutions see economy at turning point
- Consumer pessimism is rampant; "wall or worry" is abundantly clear (flight to safety)
- Deflation risk rather than inflation
- The Federal Reserve ("FED") taking little to no action
- Credit spreads tend to be at their widest point, but the outlook for an improving economy tempers the risk-off trade
- Yield curve continues to steepen its steepest point
MARKET INDICATORS
- Equity: Dial-up equity allocation, considering growth.
- Sectors: Consider financials, technology, transportation and defense.
- Alternatives: A potential pull-back in asset prices across the markets may result in long-term growth notes becoming
more attractive (potential entry point).
- Fixed Income: "Reasonable" credit risk based on investor situation and objectives; selective market risk.
• Consider bonds with higher coupons
• Monitor call features and call protection
PORTFOLIO ADJUSTMENT CONSIDERATIONS
- Stock market experiencing the beginnings of a bull market
- Businesses and corporate profits begin to improve
- Consumer sentiment improves, but remains cautious; housing starts to pick-up
- Inflation stabilizes
- The Federal Reserve ("FED") is neutral or pauses, watching for signs of inflation
- Credit spreads begin to stabilize and tighten as investors rotate from risk-off bonds and confidence in risk-on positions
- Yield curve stabilizes and steepens, watching for signs for inflation
MARKET INDICATORS
- Equity: Dial-up exposure small- and mid-cap, where appropriate.
- Sectors: Consider financials, technology, transportation and telecom.
- Alternatives: A potential pull-back in asset prices across the markets may result in mid- to long-term growth notes
becoming more attractive (potential entry point).
- Fixed Income: "Reasonable" credit risk based on investor situation and objectives.
PORTFOLIO ADJUSTMENT CONSIDERATIONS
Growth
- Stock market is performing well, on average
- Businesses increase borrowing; IPOs begin to rise, and banks begin to loosen credit standards
- Consumer confidence trending toward cautious optimism
- Inflation risks picks up
- FED is neutral, watching for signs of inflation
- Credit spreads continue to narrow as investor risk appetite begins to broadly improve
- Yield curve stabilizes and steepens, watching for signs of inflation (>>)
Economic & Business Cycle
- EQUITY: Dial-up exposure with particular focus on small- and mid-cap, as well as emerging markets
- SECTORS: Consider industrials, materials, commodities, and metals
- ALTERNATIVES:
- BONDS: Dial-up portfolio credit risk slightly while looking to decrease market risk; being to strategically
lower durection
• Consider higher corporate allocation
• Consider lower Treasury and/or agency allocations
Managing Market & Credit Risk
ECONOMY IS GROWING
01
- Stock market is performing well, on average
- Businesses increase borrowing; IPOs begin to rise, and banks begin to loosen credit standards
- Consumer confidence trending toward cautious optimism with consumption improving as labor
prospectus improve
- Inflation risk picks up
- The Federal Reserve ("FED") is neutral, watching for signs of inflation
- Credit spreads continue to narrow as investor risk appetite begins to broadly improve
- Yield curve stabilizes and steepens, watching for signs of inflation (>>)
MARKET INDICATORS
- Equity: Dial-up exposure with particular focus on small- and mid-cap, as well as emerging markets
- Sectors: Consider industrials, materials, commodities, and metals
- Alternatives: Consider short-term growth notes. May also look to select income notes to potentially
generate enhance yield in a tightening spread environment.
- Fixed Income: Dial-up portfolio credit risk slightly while looking to decrease market risk; being to
strategically lower durection
• Consider higher corporate allocation
• Consider lower Treasury and/or agency allocations
PORTFOLIO ADJUSTMENT CONSIDERATIONS
ECONOMY IS GROWING
01
VIEW YIELD CURVE
A Positive Yield Curve is the most common shape, reflecting higher interest rates for longer-term bonds compared to shorter-term bonds. Lending money for a longer period of time is typically considered more risky due to unexpected negative events that could occur, resulting in higher volatility. The investor is compensated with a higher yield in exchange for this greater long-term risk.
9.00%
7.00%
5.00%
3.00%
1.00%
3m
5y
10y
30y
Interest Rates
Maturity
Positive "Normal" Yield Curve
Positive "Normal"
Positive "Normal" Yield Curve
Steepening
Yield Curve
Inverted
Yield Curve
Flat
Yield Curve
Humped
Yield Curve
Positive "Normal" Yield Curve
A Steepening Yield Curve generally indicates that long-term yields are rising at a faster rate than shorter-term yields. Historically, this signals the beginning of an economic expansion.
Steepening Yield Curve
Positive "Normal"
Steepening
Yield Curve
Steepening
An Inverted Yield Curve results when longer-term yields fall below shorter-term yields, and is generally a leading indicator of the an economic downturn. Historically, this occurs when there is a perception that interest rates will decline in the future, sometimes due to the expectation of declining inflation.
Inverted Yield Curve
Inverted
Inverted
Yield Curve
A Flat Yield Curve occurs when all maturities have similar yields. In this scenario, a 30-year bond and a 10-year bond have essentially the same yield. Generally, this occurs when there is a transition between the normal yield curve and the inverted yield curve.
Flat Yield Curve
Flat
Flat
Yield Curve
A Humped Yield Curve occurs when medium-term yields are greater than both short-term yields and long-term yields. A humped curve is rare and typically indicates a slowing of economic growth.
Humped Yield Curve
Humped
Humped
Yield Curve
VIEW YIELD CURVE
VIEW YIELD CURVE
VIEW YIELD CURVE
VIEW YIELD CURVE
VIEW YIELD CURVE
VIEW YIELD CURVE
VIEW YIELD CURVE
Growth
- Stock market is performing well, on average
- Businesses increase borrowing; IPOs begin to rise, and banks begin to loosen credit standards
- Consumer confidence trending toward cautious optimism with consumption improving as labor
prospectus improve
- Inflation risk picks up
- The Federal Reserve ("FED") is neutral, watching for signs of inflation
- Credit spreads continue to narrow as investor risk appetite begins to broadly improve
- Yield curve stabilizes and steepens, watching for signs of inflation
MARKET INDICATORS
- Equity: Dial-up exposure with particular focus on small- and mid-cap, as well as emerging markets
- Sectors: Consider industrials, materials, commodities, and metals
- Alternatives: Consider short-term growth notes. May also look to select income notes to potentially
generate enhance yield in a tightening spread environment.
- Fixed Income: Dial-up portfolio credit risk slightly while looking to decrease market risk; being to
strategically lower durection
• Consider higher corporate allocation
• Consider lower Treasury and/or agency allocations
PORTFOLIO ADJUSTMENT CONSIDERATIONS
ECONOMY IS GROWING
01
VIEW YIELD CURVE
Advisors Asset Management. Advisors Asset Management, Inc. (AAM) is a SEC-registered investment advisor and member FINRA/SIPC.
Registration does not imply a certain level of skill or training.
18925 Base Camp Road • Monument, CO 80132 • www.aamlive.com
CRN: 2022-0411-9936 R
Navigating Market Cycles was created using empirical research and analysis by highly experienced market observers and is designed for informational purposes only.
All investments involve risk; principal loss is possible. Fixed income securities are subject to certain risks including, but not limited to: interest rate risk (changes in interest rates may cause a decline in the market value of an investment); credit risk (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment risk (debt issuers may repay or refinance their loans or obligations earlier than anticipated); below investment grader risk (commonly known as “high yield” or “junk” securities, they may be considered speculative and may be subject to greater market and credit risks. Accordingly, the risk of defaults may be higher than investment grade securities. In addition, these securities may be more sensitive to interest rate changes and may be more likely to make early returns of principal. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings; duration risk (measures the sensitivity of a bond’s price to a one percent change in interest rates. The higher a bond’s duration, the greater its sensitivity to interest rates changes). Market risk, or systematic risk, is the risk that results from the characteristic behavior of an entire market or asset class.
A yield curve shows the relationship between the yields on short-term and long-term bonds of the same investment quality. A premium bond has a price higher than its face value. A premium bond generally occurs when a particular bond’s coupon rate exceeds the interest rates prevailing at the time. Fallen angels are bonds whose rating declined from investment grade to high yield. A cushion bond is a type of callable bond that sells at a premium because it carries a coupon rate that is above market interest rates. A sympathy bond trades lower as part of a broad sector move, despite having different fundamentals and metrics. Bond credit spreads refer to the difference in yield between a US Treasury bond and another debt security of the same maturity but different credit quality. Credit spreads are often used as a barometer of economic health; widening is viewed as “bad”, and narrowing is viewed as “good”.
back to top
No securities are being offered. All AAM employees, including research associates, receive compensation that is based on the overall performance of the firm. AAM may make a market in or have other financial interests in any security or sector discussed. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this report. Past performance does not guarantee future performance. The investment ideas shown may not be appropriate or suitable for all investors. Any suggestion of cause and effect or of the predictability of economic cycles or investment cycles is unintentional. Nothing contained herein constitutes investment, legal, tax or other advice.
Unless otherwise stated, all information and opinions contained in this publication were produced by Advisors Asset Management, Inc. (AAM) and other sources believed by AAM to be accurate and reliable. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and best interests. All expressions of opinions are subject to change without notice.
©2024 Advisors Asset Management, Inc. All rights reserved. Disclosures. Privacy Policy