Market and economic environments and asset allocation
A new Vanguard research note uses an innovative machine-learning clustering technique to objectively classify the macroeconomic and market environment into five states: recession, recovery, expansion, slowdown, and high inflation. For the most part, these states intuitively resemble the business cycle and key market states we’ve historically experienced.
It discusses the characteristics, fundamental valuations, and long-run return expectations of each of these states and finds that for investors willing to take on active risk, a dynamic, state-dependent approach is more suitable than a static portfolio.