The magic cycle in investment: Merrill Lynch's Investment Clock

Bank of America Merrill Lynch was one of the most famous banks involved in the 2008 financial crisis. Although the bank became a typical failure in the subprime crisis, the famous theory it proposed was left for all investors, which is the investment clock of Merrill lynch.

Merrill Lynch’s investment clock is a way to link the business cycle to asset and industry rotation. It’s an essential theory especially for long-term investors who investNot only instocks but also in ETFs, futures, commodities, and bonds.

Merrill Lynch's investment clock divides the economic cycle into four stages. They are reflation, recovery, overheat, and stagflation. The theory suggests people invest based on the stage the economy is currently in.

According to the theory, Merrill Lynch’s Investment Clock splits the economic cycle into four different phases, which are determined by the direction of growth relative to trend as well as the direction of inflation. The assets and equity in the according to phase would outperform the rest, while the assets and equity in the opposite corner tend to underperform.

A classic boom-bust cycle would start from the bottom left and move clockwise as Bonds, Stocks, Commodities, and Cash outperforms in turn. With that being said, the market is always more complicated than theory. Sometimes the clock could move backward or skips a phase. You should make your judgments on the future stage of the global economic cycle according to the market.