What trading strategy is suggested if economic growth slows?

What trading strategy is suggested if economic growth slows?

• A. Short bonds and long equities
• B. Long bonds and short equities vulnerable to rate hikes
• C. Invest in high-yield savings accounts
• D. Buy more equities regardless of economic indicators

Answer: (B)

When economic growth slows, bond prices often rise as investors seek safer assets, resulting in lower yields. Consequently, taking a long position in bonds becomes attractive as they can provide stability and potential appreciation as interest rates decrease. In contrast, equities, particularly those that are sensitive to economic cycles, typically face downward pressure during economic downturns or periods of slowed growth. This makes equities, especially those vulnerable to higher interest rates, less favorable. Positioning oneself to short equities that are likely to suffer from reduced consumer spending or decreased earnings due to slowing growth allows the investor to hedge against potential losses in that segment. Therefore, going long on bonds while shorting equities is a strategic response to a weakening economy, as it provides a balanced approach to risk amid uncertainty.

When economic growth slows, bond prices often rise as investors seek safer assets, resulting in lower yields. Consequently, taking a long position in bonds becomes attractive as they can provide stability and potential appreciation as interest rates decrease. In contrast, equities, particularly those that are sensitive to economic cycles, typically face downward pressure during economic downturns or periods of slowed growth. This makes equities, especially those vulnerable to higher interest rates, less favorable.

Positioning oneself to short equities that are likely to suffer from reduced consumer spending or decreased earnings due to slowing growth allows the investor to hedge against potential losses in that segment. Therefore, going long on bonds while shorting equities is a strategic response to a weakening economy, as it provides a balanced approach to risk amid uncertainty.