Asset Allocation and the Business Cycle:
The business cycle, measured by the ISM, is the key driver of asset prices across equities, commodities, credit, and crypto. Different assets have different lead/lag times to the ISM.
A framework of leading and lagging economic indicators can be used to track phases of the cycle.
The cycle can be broken into "four seasons" based on the growth and inflation mix: Spring (growth accelerating, inflation falling), Summer (growth and inflation accelerating), Fall (growth falling, inflation accelerating), and Winter (growth and inflation falling).
Each season favors different assets e.g. Spring favors tech/growth/crypto, Summer favors commodities and cyclicals. Late 2022 was the transition from Winter to Spring.
The current environment in mid-2024 is showing signs of moving from Spring to Summer, with a broadening of cyclical and commodity outperformance.