Regime Change
A persistent shift in the statistical relationships that govern asset returns, usually triggered by a structural change in policy, inflation, or growth.
Definition
A regime is the prevailing combination of growth, inflation, and policy that makes certain factor exposures profitable and others a drag. Regimes shift when the underlying drivers do — a move from disinflation to inflation, from QE to QT, from globalization to fragmentation.
Returns that worked in the prior regime usually fail in the next; the strategies that thrive are the ones designed for the new combination.
Why it matters
Most portfolio drawdowns occur because a stable allocation was built for the prior regime and is the last to adapt.
Worked example
2022: a multi-decade disinflation regime ended. The 60/40 portfolio — designed for stocks and bonds to diversify — had its worst year since the 1970s as both fell together.
Frequently asked
How long does a regime last?⌄
What signals a regime change?⌄
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Are regimes global or local?⌄
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