Implications of Economic Expansion on Portfolio Management

Hard Economic Analysis Business Cycle Analysis

A financial analyst at a global investment firm is evaluating the implications of the current economic environment on investment strategies. The economy is currently in an expansion phase, characterized by rising GDP growth, increasing employment levels, and higher consumer spending. However, there are emerging concerns about supply chain bottlenecks and increasing inflation rates that could signal potential overheating. The analyst is contemplating how these factors could influence sector performance and asset allocation decisions.

Which of the following statements best captures the primary implications of the business cycle phase on portfolio management strategies?

In an expansion phase, portfolio managers should focus on defensive sectors, as they tend to outperform during strong economic growth.

While in an expansion phase, managers should consider increasing allocations to cyclical sectors, but remain vigilant about inflation risks that could affect growth.

During an expansion phase, it is advisable for portfolio managers to reduce equity exposure and prioritize high-grade bonds due to rising employment and spending.

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