Clockwise: The Investment Clock revisited

The Investment Clock is one of several factors feeding into our asset allocation process. It provides a way to tell the time using economic indicators that tell us about the strength of growth and the direction of inflation to see where which part of the economic cycle we are heading in. By tracking the indicators month after month we can understand how the business cycle is developing.

At the time of writing, the Clock is in Stagflation, which is holding us back from what would otherwise be a more positive position on stocks given strong trends in corporate earnings. We see little risk of recession in the near term. In fact, rising business confidence raises the potential of a move back towards Overheat – a period characterised by strong commodity prices, rising bond yields and analyst earnings upgrades.

The cycle of life

There is a time for everything and a season for every activity under the heavens" – Ecclesiastes 3:1

The cyclical nature of human endeavour is as old as time itself. In the Book of Genesis, Joseph warns the Pharaoh that seven years of plenty will be followed by seven years of famine. On the Indian subcontinent, Vedic teaching describes time as an eternal cycle of creation, preservation and destruction.

It stands to reason that financial markets also follow cycles. Nathan Rothschild, founder of the banking dynasty, recognised this in 1810 when he said, ‘Buy when the cannons are firing, and sell when the [victory] trumpets are blowing.’ He was speaking literally in the Napoleonic Wars, but there is a clear economic parallel. An investor should consider buying stocks when the future looks bleak and selling stocks when they are priced for perfection.

The use of a clock face to illustrate the boom-bust cycle with various investments positioned where they tend to perform best is not a new one. What is missing from most investment clocks is a way to tell the time. Given the lags before economic data is released, we cannot know for sure that we are in a recession until several months later. Without a crystal ball, how are we to know if we are early cycle, mid cycle or late cycle in an expansion?

Telling the time

What my research on the Investment Clock brought to the table in the late 1990s was a way to tell the time using global growth and inflation indicators. In the stylised business cycle, inflation lags growth, picking up some time after growth recovers and rising for some time after it peaks (Figure 1).

Figure 1: Stylised business cycle showing growth and inflation

Source: RLAM for illustrative purposes only

The growth line on this stylised diagram represents output relative to the long trend in productive capacity, something economists refer to as the ‘output gap’. When economic activity is below potential, spare capacity and weak labour markets trend to drag prices and wages lower. When growth has recovered to the extent that the economy is operating above potential, shortages and tight labour markets push prices and wages higher. It is the role of central banks in a modern market economy to step in, either to cut or raise interest rates, to get growth and inflation back on track.

While it is difficult to know in real time that we are at a peak or a trough in growth and inflation cycles, major turning points are clear with the benefit of hindsight. As such, real returns from the main asset classes – bonds, stocks, commodities and cash – classified according to the growth and inflation backdrop support the intuition (Figure 2). Government bonds do best in Reflation, stocks in Recovery and commodities in Overheat. Cash outperforms financial assets in Stagflation, as expected, but these episodes have typically been oil price shocks with commodity prices surging.

Figure 2: Historic asset class returns across the business cycle

Past performance is not a guarantee or reliable indicator of future returns.

Source: Refinitiv DataStream and Royal London Asset Management, as at 31 December 2025. For illustrative purposes only. Figures show average annualised real returns for asset classes within each Investment Clock phase, based on Royal London Asset Management analysis of business cycles from April 1973 to December 2025.

The Investment Clock

The Investment Clock is the same concept re-drawn as a circle (Figure 3). Growth becomes the up-down axis and inflation becomes left-right. In a normal cycle, we move clockwise. We can use economic indicators that tell us about the strength of growth and the direction of inflation to see where we are and where we may be heading. Real life is complicated – and growth and inflation sometimes do surprising things in response to economic shocks or the outbreak of war. By tracking the indicators month after month we can understand how the business cycle is developing. 

Figure 3: The Investment Clock

Source: Royal London Asset Management as at October 2026. For illustrative purposes only. The views expressed are the author’s own and do not constitute investment advice. The Investment Clock is updated by the Multi Asset team on a regular basis. Monthly readings shown on the clock face are based on a large number of growth and inflation indicators from around the world.

The four phases of the Investment Clock each tend to favour a particular set of investments, as shown in Figure 3, a refreshed version of the diagram. This refreshed version has been launched alongside an interactive version of the Investment Clock.

The vertical axis represents economic sensitivity. In an expansion, stocks and commodities typically do best, technology and cyclical sectors outperform defensive sectors and corporate bonds outperform government bonds. In a slowdown, bonds and defensive sectors may be a better place to invest.

The horizontal axis represents inflation sensitivity. When inflation and interest rates are trending lower, financial assets tend to outperform real assets as the discount rate used to value future cash flows declines. Growth and financial sectors tend to outperform value stocks and long duration conventional bonds outperform. When inflation is on the rise, commodities offer better returns alongside high yield bonds, short-dated index-linked bonds and cash.

How long is a cycle?

According to the National Bureau of Economic Research (NBER), there have been 34 peaks and troughs in the US economy since 1854. The average business cycle has lasted around five years. Recessions are generally short and nasty, but there has been wide variation in the length of economic expansions (Figure 4). The good times have rolled for longer when inflation has been low or falling, as we saw in the 1980s, 1990s and 2010s, with central banks willing and able to cut interest rates to keep the economy moving. Expansions have been shorter during periods of high and spiky inflation like the 1970s and around the two World wars. We are currently six years into the post-pandemic expansion, but central banks are raising interest rates in response to inflationary pressure from the Middle East conflict.

Figure 4: NBER cycle lengths

Source: National Bureau of Economic Research as at 7 October 2026.

Economic theory identifies three types of business cycle

1. The Kitchin cycle is a ‘mini cycle’ which sees a year or two of stronger growth followed by a year or two of weaker growth. Economists believe this natural ebb and flow in production and employment is driven by inventory management. Businesses accumulate stocks of unsold goods in anticipation of stronger demand, creating a positive feedback loop in the economy. When demand eventually falls short of expectations, they cut production and the feedback loop goes into reverse.
2. The traditional five-year business cycle tracked by the NBER aligns with the Juglar cycle reflecting capital investment in machinery, equipment, and infrastructure. Spare capacity and cheap money triggers an investment boom which boosts growth. The economy goes into recession when the capital stock becomes overbuilt and higher interest rates weigh on demand.
3. The longest cycle is the Kondratiev Wave lasting 40–60 years. This is a ‘super cycle’ linked to productivity-enhancing technological revolutions like steam power, the railways, electrification and petrochemicals. We are currently in a silicon revolution, centred on connectivity and computing power, which is a reason for optimism.

Regular followers of the Multi Asset team’s work will notice that the Investment Clock trail can move around quite quickly, tracking inventory cycles or even shorter-term disruptions to the macro outlook caused by events like the onset of Covid 19, US tariff announcements or the outbreak of war. Full-blown recessions are infrequent, but what may at first appear to be a harmless mid-cycle slowdown can develop into something more serious. Financial markets price in recessions far more often than they actually occur and, for active investors, the journey is as important as the destination.

The Investment Clock has little to say about super cycles but there is one important point to make. Technological innovation waves are almost always associated with asset price bubbles and periods of overinvestment, as we saw in the late 1990s. Nobody un-invented the internet, but technology stocks lost investors a lot of money when the US economy went into recession. Ignore the business cycle at your peril.

Heading for Overheat?

The Investment Clock is one of several factors we take into account when setting tactical asset allocation positions. Right now, it is in Stagflation, which is holding us back from what would otherwise be a more positive position on stocks given the strong trend in corporate earnings. We see little risk of recession in the near term and increasing business confidence raises the chances of a move back towards Overheat – a period characterised by strong commodity prices, rising bond yields, analyst earnings upgrades and central bank rate hikes.

A prolonged series of interest rate increases could tip the world economy into recession and deflate heady stock market valuations, but in our view, the monetary tightening to date is not sufficient to pose such a threat. In the meantime, we are positive on stocks, especially in the technology sector and in regions like the US, Japan and selected emerging markets which benefit most from the AI boom. Current events don’t only recall the 1990s, though. Geopolitical upheavals reminiscent of the 1970s mean we also favour exposure to commodities, including gold. History never repeats itself, but sometimes it sure does rhyme.

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance isnot a guide to future performance. Reference to any security is for information purposes only and should not be considered a recommendation to buy or sell.

The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice. Forward looking statements are subject to certain risks and uncertainties. Actual outcomes may be materially different from those expressed or implied.