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Regime Summary

Expansion Playbook

Economic growth is accelerating with rising GDP, falling unemployment, and moderate inflation. This is typically the most favorable environment for risk assets, but vigilance is required as expansions eventually mature and end.

Contraction Playbook

Economic growth is slowing or negative, unemployment is rising, and corporate earnings are declining. This is the most challenging environment requiring defensive positioning and capital preservation.

Key Indicators
  • GDP growth above trend (>2.5%)
  • Unemployment falling or low (<5%)
  • Inflation moderate (2-3%)
  • Corporate earnings growing
  • Fed policy accommodative to neutral
  • GDP growth negative or below trend
  • Unemployment rising
  • Corporate earnings declining
  • Credit spreads widening
  • Fed policy shifting to accommodation
Asset Allocation Comparison
AssetexpansionChangecontraction
US Equities
overweight
Changed
underweight
Growth Stocks
overweight
Changed
neutral
Cyclicals
overweight
Changed
underweight
Bonds
underweight
Changed
neutral
Cash
underweight
Changed
overweight
Gold
neutral
Changed
overweight
Treasury Bonds
neutral
Changed
overweight
Defensives
neutral
Changed
overweight
High Priority Actions
HighMaintain Equity Exposure

Stay invested in equities, particularly growth-oriented sectors that benefit from economic expansion. Don't fight the trend.

HighMonitor Valuation Extremes

While staying invested, be aware of valuation levels. Extreme valuations during expansion often precede painful corrections.

HighRaise Cash Levels

Cash is king during contractions. Having dry powder allows you to buy quality assets at distressed prices.

HighReduce Equity Exposure

Cut positions in cyclical and high-beta stocks. The first loss is often the best loss.

HighExtend Duration in Bonds

Quality bonds rally during contractions as the Fed cuts rates. Extend duration to capture price appreciation.

Historical Parallels
  • 1995-2000: Tech boom expansion
  • 2003-2007: Housing-led expansion
  • 2010-2019: Post-GFC recovery
  • 2021-2022: Post-COVID expansion
  • 2000-2002: Dot-com bust
  • 2007-2009: Global Financial Crisis
  • 2020 Q1-Q2: COVID crash
  • 2022: Rate shock contraction
DLS Wisdom
"The market can remain irrational longer than you can remain solvent - but it can also remain rational longer than bears expect."
"In an expansion, the biggest risk is not being invested."
"The time to be greedy is when others are fearful - but only after the fear has peaked."
"Preservation of capital is the first rule. Making money is the second."

Compare playbooks to understand how your strategy should adapt when regimes change