Investment Weather and Clock

Asset classes move in and out of favor as per the economic cycle. For example, real estate typically declines late in recessions and stock prices start increasing again during the early recovery.

There are several frameworks and formats that summarize the implications of the economic cycle on asset prices. The two most common ones use analogies to concepts from everyday life in order to convey their messages most intuitively. They are the investment weather, which parallels the weather forecast, and the investment clock, which borrows from the idea of a clock.

The key challenges of these frameworks lie in accurately identifying where the economy is in the current cycle. Event studies could help in this assessment by specifying the abnormal returns of different asset classes, factors, or sectors. In doing so, they provide a quantified view of the market's perspective on the economic outlook and thus on the position in the cycle. Updated daily and tracked over time, rules could be applied to create a more data-driven approach to an analysis that is otherwise dominated by opinion.