Macro regime classification

Why regime classification matters

Asset class correlations are not constant. They change depending on the macro regime:

In a growth regime: Equities outperform. Bonds underperform. Credit spreads compress. Cyclical sectors lead. The traditional 60/40 portfolio works.

In a recession regime: Bonds outperform. Equities decline. Credit spreads widen. Defensive sectors lead. Duration is a hedge.

In an inflationary regime: Commodities and real assets outperform. Bonds decline (rising yields). Equities are mixed - energy and materials benefit, rate-sensitive sectors suffer. Cash erodes.

In a stagflationary regime: Both equities and bonds can decline simultaneously. The 60/40 hedge breaks. Commodities and gold typically outperform. This is the most dangerous regime for traditional portfolios because the usual hedges fail.

In a fragmented regime: Different asset classes price different macro states simultaneously - equities price growth while bonds price stagnation and commodities price supply disruption. Cross-asset dispersion is elevated. Directional positioning underperforms; relative value and sector selection outperform.

Without knowing the regime, investors make positioning decisions based on assumptions about correlations that may not hold. Regime classification is the foundation that other investment decisions build on.

How Market Ontology classifies the regime

Market Ontology's regime classification system evaluates four dimensions in real time:

Recession risk

Inputs: yield curve slope (10Y-2Y spread), unemployment rate and trend, high-yield credit spreads, leading economic indicators. The system classifies recession risk as Low, Moderate, Elevated, or High based on the combination of these signals.

Inflation path

Inputs: CPI month-over-month changes, core CPI trend, trimmed mean and sticky CPI measures, breakeven inflation rates, producer prices. The system classifies the inflation path as Rising, Stable, Falling, or Volatile.

Policy path

Inputs: current federal funds rate, Fed dot plot trajectory, market-implied rate path (fed funds futures), recent FOMC statement language (hawk/dove NLP scoring), global central bank policy rate trends. The system classifies the policy path as Tightening, On Hold, Accommodative, or Emergency.

Financial conditions

Inputs: VIX, investment-grade and high-yield credit spreads, TED spread, financial conditions indices, equity volatility, dollar index. The system classifies conditions as Loose, Neutral, Tight, or Stress.

The combination of these four dimensions produces a regime label. Examples:

• "Goldilocks Growth": Low recession risk + stable/falling inflation + accommodative policy + loose financial conditions. Equities rally. Credit compresses. All correlations behave.
• "Disinflationary Growth with Policy Divergence": Low recession risk + moderating inflation data + accommodative policy path - BUT a geopolitical supply shock is overriding the inflation signal. The macro data says cut rates. The supply shock says hold. This is the current regime as of early April 2026, driven by the Hormuz crisis.
• "Stagflation Risk": Elevated recession risk + rising inflation + frozen policy path + tightening financial conditions. The most dangerous regime for traditional portfolios.

Regime transitions: what triggers a shift

Regime transitions are the highest-impact moments for portfolio returns. They're when correlations change, hedges fail, and positioning gets caught wrong-footed.

Common transition triggers:

• Supply shocks (Hormuz, OPEC cuts, commodity disruptions) can push a growth regime into stagflation risk by adding an inflation impulse without improving growth
• Central bank pivots (unexpected rate changes, QE announcements, forward guidance shifts) can push a restrictive regime toward accommodation or vice versa
• Credit events (bank failures, sovereign defaults, corporate distress) can push a growth regime into financial stress
• Geopolitical escalation (military conflicts, sanctions, trade wars) can push any regime toward uncertainty and fragmentation

Market Ontology tracks regime transitions in real time and highlights when the classification changes. The dashboard shows the current regime label and the direction of each component, allowing investors to monitor for transition signals.

Tracking the current regime

Market Ontology's dashboard displays the current regime classification alongside the underlying data: key macro indicators with values, changes, dates, and trend sparklines. This allows investors to verify the regime label against the raw data and form their own view.

The daily intelligence feed contextualizes the regime with the most important geopolitical, policy, and market developments - connecting the "what is the regime" to the "why is this the regime."