Don’t Forget Your Coat…

by | Nov 19, 2019 | Commentary & Insights | 0 comments

Since moving from London to Cornwall, my lifestyle has become far more attuned to the changing seasons and the different weather conditions they each bring. This is no doubt because I now spend less of my time on the underground and in the city, and more time outside enjoying the Cornish outdoors.

More recently I have been thinking about how closely the changing seasons, and the impact they have on us, corresponds with the economic cycle and how each phase can impact upon our behaviours when it comes to investing.

A traditional economic cycle looks like this:

Over time, the economy expands and contracts creating different economic environments which repeat themselves to create the economic cycle. During these changing environments, various assets behave differently, producing varying returns.

This is very similar to how we move through the four seasons which bring with them different weather conditions and in turn a variety of emotions. Depending on the season and the resulting weather, animals, plants and humans all vary their behaviour to adjust to their new surroundings.

Whilst most of the planet enjoys four distinct seasons, changes to the earth’s atmosphere and the impact of humans has made them more difficult to predict. In some parts of the world, seasons have become more prolonged and in others less defined. Again, this is similar to periods of expansion and contraction in different parts of the global economy.

The economic cycle does not run like clockwork and the frequency and duration of each cycle has changed over time, especially more recently as a result of central bank intervention. Therefore, predicting when an economic environment (season) will end and a new one will begin is almost impossible.

Over a year, we generally have an expectation of what the weather will be like in each season. Autumn and winter are generally colder and wetter than spring and summer.

Similarly, we have varying investment expectations in different economic environments. For example, an economic winter or recession usually results in lower returns for risk assets such as equities. This is illustrated by the chart below:

While equities perform poorly in recessions, the next chart shows that safe assets such as US government bonds can provide positive returns and a measure of protection.

During summer you want to carry sun cream while in the winter you would likely carry a coat. Similarly, investors should hold more equities in their portfolio during an expansion but more bonds during a recession. Knowing what to hold and when is a difficult choice to make, particularly if you decide to pick one over the other. That’s why it makes sense to, at the very least, always hold a percentage in each and tilt towards either depending on your expectations.

Ensuring clients’ portfolios contain the appropriate blend of assets is one of our main roles as advisers and wealth managers. As part of this, not only do we assess the individual risk preferences and objectives of clients, but also consider where we are in the investment cycle. As we move through time, we adjust the asset allocation appropriately in a response to the changing environment.

Since the depths of the winter months that were the 2008 Financial Crisis, we have enjoyed an extended summer with many years of positive equity returns. However, it is difficult to know what stage of the summer we are in and when this might turn into autumn.

Over the last year or so we have started to see signs of slowing global growth. This could be a sign of an impending winter or it could just be a colder rainy day, during an otherwise warm and sunny summer. What we do know is we have enjoyed a long summer by historical standards and, at some point, the coat will come in handy as we head into autumn and winter.

With this in mind, we want to be prepared ensuring our portfolios are positioned correctly and metaphorically equipped with both a coat and sun cream. In our view, it is better to have your coat and not use it, than get caught in the rain when you really need it. In the meantime, summer could still run on for longer, but we will make sure portfolios are ready for when the leaves do start to turn.


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General Disclosures: This article is based on current public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.

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