During the early part of an economic recovery, productivity flows to the benefit of the companies, not the employees. Since labor represents 60% to 65% of the expenses of most companies, productivity gains improve profit margins rapidly. Corporate earnings start to come up and Price/Earnings ratios start to fall.
Bond prices peak and the stock market starts to rise again. As such, it is an opportunity to change your asset allocation to increase your holdings of stocks and decrease your holdings of bonds while locking in your gains.
In the stock market, you can increase the beta of your portfolio back to 1. It is a good time to give a growth tilt to the portfolio, as during the early part of a recovery, growth may be found at a lower P/E. Small cap stocks often do better than large cap stocks during the early stages of an economic recovery. So giving your portfolio more of an emphasis in small caps may be profitable. In bonds, it is a time to start positioning the portfolio for eventual rising interest rates. You can allow the duration to shorten naturally and you can start to buy floating rate paper. There is no rush; this can be opportunistic, buying when you find good value.
This is also a time when you can buy distressed bonds that you think have a good chance at recovery. For example, we bought some utility bonds that were in a state that had problems. We were sure this utility would survive even if others in the state didn't. All of them were beat up. We rode the bonds from a dollar price of $72/100 to $120/100, a phenomenal gain in bond land. We did a similar thing with some telecom bonds. In both cases we bought bonds of good companies that were in "bad neighborhoods." We did extensive due diligence and felt the market had mis-priced the risk.
This can be one of the best times to own high yield bonds as well. The worst companies went out of business during the recession, and the remaining are benefiting from the improving margins. The bond prices may rise rapidly.
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