Growth, Inflation and the Four Market Seasons

Economic conditions can be sorted into four rough seasons by asking two questions: is growth rising or falling, and is inflation rising or falling? The answers give four combinations, and each has a typical pattern of winners and losers. The framework is a simplification, but it helps a trader avoid fighting the broad tide.

The four combinations

• Rising growth, falling inflation: often the friendliest season for equity indices, with steady currencies and quiet gold.
• Rising growth, rising inflation: commodities and commodity currencies tend to lead, while bonds struggle and indices become selective.
• Falling growth, rising inflation: the hardest season, where both bonds and equities can fall together and gold and the dollar often attract demand.
• Falling growth, falling inflation: bonds usually perform, central banks ease, and interest-rate sensitive indices can recover before the economy does.

Where the signals come from

You do not need a model to place the current season. Purchasing manager surveys and employment trends describe growth; the inflation reports and wage data describe prices. Watch the direction of change more than the level. An economy with high but falling inflation behaves differently from one with low but rising inflation.

Markets also move ahead of the data. Equity indices often bottom while the growth numbers are still getting worse, because traders are pricing the next season rather than the current one. This is why the framework is a context tool, not an entry signal.

Applying it to a trading plan

Once you have a view of the season, use it to decide which setups deserve more size and which deserve less. In a growth-and-inflation season, pullbacks in oil or the commodity currencies are more likely to hold. In a falling-growth season, rallies in cyclical indices are more likely to fail. The chart still decides the entry; the season decides the conviction.

Change your view slowly. Seasons last months, and a single data point rarely ends one.

What to watch

Watch the direction of the growth surveys and the core inflation trend together, the behaviour of gold and the dollar when both move the same way, and the moment an index stops falling on bad news, which is often the first sign the season is changing.