The four-regime table
Lesson 21 · about 11 min
Take the direction of growth and the direction of inflation, and you get four combinations. Each has a name, a set of assets that have historically tended to do well, and a set that has tended to struggle. This is the simplest useful macro framework, and it is useful precisely because it is simple enough to update every week from the checklist.
The table
| Inflation rising | Inflation falling | |
|---|---|---|
| Growth rising | Quadrant 1: reflation / overheating. Commodities, cyclicals, value, EM, short bonds have tended to lead. Long bonds and long-duration growth have tended to lag. Central bank likely tightening. | Quadrant 2: goldilocks / disinflationary boom. Equities broadly, especially growth and tech, and credit have tended to lead. Commodities mixed. Central bank on hold or easing gently. The equity market's favourite quadrant. |
| Growth falling | Quadrant 4: stagflation. Commodities and energy, cash, and sometimes gold have tended to hold up. Both equities and bonds have tended to struggle, and the stock-bond correlation turns positive. Central bank trapped between mandates. | Quadrant 3: deflationary slowdown / recession risk. Long bonds, defensives, quality, and gold have tended to lead. Cyclicals, commodities, small caps and credit have tended to lag. Central bank easing. |
"Tended to" is doing real work in every cell. These are the directions that have shown up more often than not across past cycles, not a guarantee for the next one. The 2020s have produced at least one quarter where the table was wrong about nearly every cell, and the honest reader treats the table as a prior to be tested against the current stock-bond correlation and sector leadership, not as a forecast.
How to place the current quarter
Growth direction: is the trend of ISM, claims, payrolls and GDPNow improving or deteriorating over the last three months? Use the level and trend from Module 1, not last week's surprise.
Inflation direction: is the three- or six-month annualised core inflation rate rising or falling? Is the 10-year breakeven rising or falling? Are central banks describing inflation as a problem or as progress?
Then look for confirmation in the market:
| Regime | Stock-bond correlation | Sector leadership | Curve tendency | Dollar tendency |
|---|---|---|---|---|
| Q1 reflation | Near zero to positive | Energy, materials, industrials, financials | Bear flattening (Fed catching up) | Mixed |
| Q2 goldilocks | Negative to near zero | Tech, consumer discretionary, growth | Gentle steepening | Weak to mixed |
| Q3 slowdown | Negative (bonds hedge) | Utilities, staples, health care, quality | Bull steepening | Strong on risk-off, weak once cuts arrive |
| Q4 stagflation | Positive (both fall) | Energy, sometimes gold; little else | Flat to inverted, or bear steepening on supply | Strong |
When the sector leadership and the correlation match the quadrant you placed the economy in, you have a working regime call. When they disagree, the market is either transitioning between quadrants or trading something the table does not capture (liquidity, policy, a shock). Either way, reduce confidence.
Key idea: Growth up or down, inflation up or down: four quadrants, each with historical tendencies for what leads and what lags. Place the economy with the checklist, confirm with the stock-bond correlation and sector leadership, and treat the table as a prior, not a prediction.
Transitions are where the money and the losses are
Regimes do not change on a schedule. They change when the data trend bends, and the market often prices the transition before the data confirms it. The most common transitions and their tells:
- Q1 to Q4 (reflation to stagflation): growth data rolls over while inflation stays high. Tell: ISM new orders drop below 50 while prices paid stays elevated; the curve stops flattening and begins to bear steepen.
- Q4 to Q3 (stagflation to slowdown): inflation finally breaks lower. Tell: core inflation three-month rate falls under the six-month rate; breakevens fall; the front end starts pricing cuts.
- Q3 to Q2 (slowdown to goldilocks): growth stabilises while inflation stays low. Tell: claims stop rising, ISM bottoms, and the central bank cuts. Equities often lead this transition by months.
- Q2 to Q1 (goldilocks to reflation): growth accelerates and inflation follows. Tell: commodity prices rise, breakevens rise, the central bank starts talking about "less accommodation."
The trader's edge, if there is one here, is not in predicting the transition. It is in noticing it a few weeks earlier than someone who reads the headline number, because the checklist tracks the trend and the second-order tells. And the trader's protection is in noticing when the current regime's trades stop working, which is the earliest evidence of a transition.
A worked placement
Suppose the checklist shows: ISM has fallen from 54 to 49 over four months, claims four-week average up from 210k to 245k, payroll growth slowing, core CPI three-month annualised at 2.4% versus six-month at 3.1%, breakevens down 20bp in two months, FedWatch pricing three cuts, the curve bull steepening, utilities and staples leading, stock-bond correlation negative for six weeks.
Growth falling, inflation falling: quadrant 3. Confirmations: bull steepening, defensives leading, negative correlation. That is a coherent slowdown regime. The table suggests long-duration bonds and defensives have tended to lead, cyclicals to lag, and it suggests that "bad news is good news" should be weakening as the market moves from fearing the Fed to fearing the economy. Every one of those is a hypothesis to test against next week's data, not a position to size up.
Try it: Using this week's checklist, place the economy in a quadrant with two sentences of reasoning. List the three market confirmations you would expect to see, and check each. Then write down what data would move you to an adjacent quadrant. Keep the note; revisit it monthly.
Recap
- Four regimes from growth and inflation direction: reflation, goldilocks, slowdown, stagflation, each with historical leaders and laggards.
- Place the economy using trends (ISM, claims, payrolls, three- and six-month core inflation, breakevens), not last week's surprise.
- Confirm with stock-bond correlation, sector leadership, curve behaviour and the dollar; disagreement means lower confidence.
- Transitions have tells; the aim is to notice them a few weeks early, not to predict them.
- The table is a prior. Cycles in the 2020s have broken cells in it.