As we plan for the coming months and quarters, we rely heavily on the process that guides our investment decisions. Rather than reacting to headlines or feelings, we focus on gathering and understanding how economic data is changing, and what that means for the economy. One of the most influential pieces of data that we use is called the “Quad Framework.”
The Quad Framework uses GDP and inflation to help track the direction the economic landscape is heading. Our goal isn’t to forecast exact outcomes, but rather to understand the direction that these variables (GDP and inflation) are heading in. By looking at rates of change rather than absolute numbers, we have a more reliable way to interpret market behavior. Markets tend to react in fairly consistent ways over time to changes in GDP and inflation, and that helps guide our thinking about where the best opportunities and biggest risks reside.
The four Quads are:
- Quad 1 (Goldilocks): growth accelerating, slowing inflation,
- Quad 2 (Reflation): growth and inflation both accelerating
- Quad 3 (Stagflation): growth slowing, inflation accelerating
- Quad 4 (Deflation): growth and inflation both slowing.
Again, the Quads are not exact measurements or forecasts, they’re a tool we use as part of our process. Apart from the Quads, we have various sources of economic data surrounding the labor market, consumer spending, manufacturing, interest rates, and market volatility, among others.
When these data are showing stable or accelerating growth, markets have often rewarded riskier, growth-oriented assets. The opposite is true of unstable or slowing growth, as riskier assets are less favorable than stable and income-securing assets. Our job is to track the shifts in the market and economy to ensure we stay aligned with the most favorable assets, rather than hope the current trend continues indefinitely. This process helps us stay disciplined and remove emotion when markets are sending mixed signals.
As new data comes in, we adjust our interpretation and revisit if our positions are appropriate for the current and upcoming economic landscape. While we don’t want to make frequent, drastic moves, we do want to stay aware of how the environment is shifting and how the assets we own are likely to perform based on that shift.
If you’d like to understand more about how this process works or how it may apply to your own investment strategy, we’re always happy to discuss it.
