When deciding how to allocate asset classes in my investment portfolio, two critical economic indicators that I considered are Gross Domestic Product growth and inflation. GDP growth signals the overall economic health and activity within a country. In times of strong GDP growth, businesses typically see higher profits and consumer spending rises. This positive economic climate often leads to better performance for the company, as companies benefit from increased revenues and profitability. Therefore, during periods of a strong GDP growth, it makes sense to allocate more towards equities to capitalize on the potential for higher returns.

Inflation is another essential factor in shaping asset allocation strategies. It measures how quickly the prices of goods and services are rising. High inflation lowers the purchasing power of money, which can adversely impact fixed-income investments with set interest payments. To counteract this, investors might shift their portfolios towards assets such as real estate, commodities, and Treasury Inflation-Protected Securities, which tend to hold or increase in value during inflationary times. Also, in low inflation or deflationary environments, fixed-income securities and cash equivalents become more attractive due to their stability and capital preservation. Adjusting the portfolio based on inflation trends helps protect its value and optimize returns.