Erin Browne, Portfolio Manager, Multi-asset strategies: There are three main factors that PIMCO uses to assess the business cycle. The first is changes in growth, the second is changes in inflation, and then lastly, changes in financial conditions. We think that it's really important to focus in on these three characteristics of the business cycle because they're really important in informing us how we should trade and how we should align our asset allocation portfolios.
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As we move later business cycle, keeping an eye on the recession risks and the recession probabilities in our models is also really important, and although we think that the recession probability over the next 12 months is in the 20 to 30 percent range, as this indicator starts to pick up and we see recession probabilities increasing meaningfully, it will inform our decisions from an asset allocation perspective.
Also, as you move later business cycle, volatility tends to pick up within portfolios, and this makes it increasingly more difficult to perform with a buy and hold strategy. So being nimble, being dynamic is really important, and this is why we think at this point in the cycle it's really important to have dynamic asset allocation managers who can properly align your portfolio given the risks at hand.
As a result of this, I think it's really important to remain actively managed within your asset allocation portfolio to take advantage of some of the idiosyncratic risks that emerge as we move later cycle and throughout a higher volatility environment.
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