The Two-Axis Regime Framework
A systematic approach to classifying market regimes through constraints and expectations
Conceptual Architecture
INPUT LAYER
Valuation & constraint variables that define pressure
OUTPUT LAYER
Actual prices that move in response to inputs
💡 Key distinction: Bond yields are to bonds what P/E is to equities. Bond prices are the actual asset.
Constraint and expectation variables that define market pressure
Inflation
Purchasing power and monetary constraint
1. Inflation Matrix
CPI / PCE — Valuation of money and purchasing power
| Level | Falling ↓ | Stable → | Rising ↑ |
|---|---|---|---|
LOW < 3% | Disinflation tail | Goldilocks | Early reflation |
MID 3% – 6% | Soft landing | Nominal stability | Late-cycle pressure |
HIGH > 6% | Policy victory | Stagflation risk | Inflation shock |
Rates (Bonds)
Interest rates, yields, and fixed income valuation
2. Bond Yield Matrix (Nominal)
10Y Treasury — Nominal yield levels
| Level | Falling ↓ | Stable → | Rising ↑ |
|---|---|---|---|
LOW < 2% ZIRP environment | Deflation scare | ZIRP trap | Reflation signal |
MID 2% – 5% Normal range | Growth scare | Neutral | Tightening phase |
HIGH > 5% Elevated rates | Crisis hedge | Restrictive hold | Policy accident risk |
3. Real Yield Matrix
10Y nominal − inflation — Real return on duration
| Level | Falling ↓ | Stable → | Rising ↑ |
|---|---|---|---|
LOW < 0% Financial repression | Inflation surge | Negative carry | Breakeven tightening |
MID 0% – 2% Neutral | Real erosion | Fair compensation | Real normalization |
HIGH > 2% Restrictive | Disinflation trade | Premium hold | Volcker moment |
💡 Real yields below zero = financial repression. Above 2% = restrictive policy.
4. Fed Funds Rate Matrix
Federal Funds Rate — Policy stance and overnight rate
| Level | Falling ↓ | Stable → | Rising ↑ |
|---|---|---|---|
LOW < 2% Accommodative | Easing cycle | Accommodative hold | Liftoff |
MID 2% – 4% Neutral | Dovish pivot | Neutral stance | Tightening cycle |
HIGH > 4% Restrictive | Emergency cuts | Higher for longer | Inflation fight |
💡 Fed Funds below 2% = accommodative. Above 4% = restrictive. Direction signals policy intent.
5. Yield Curve Matrix
10Y − 2Y spread — Term premium and recession signal
| Level | Falling ↓ | Stable → | Rising ↑ |
|---|---|---|---|
INVERTED < -0.5% Deeply inverted | Bear flattening | Recession signal | Disinversion rally |
FLAT -0.5% to +0.5% Flat | Policy tightening | Neutral stance | Normalization |
STEEP > +0.5% Steep | Bull steepening | Expansion mode | Reflation surge |
💡 Inversion (negative spread) historically precedes recessions. Steepening after inversion signals recovery.
Equities
Equity valuation and risk premium measures
6. Equity Valuation Matrix (Shiller P/E)
Shiller CAPE — 10-year cyclically adjusted P/E ratio (valuation metric, not price)
| Level | Falling ↓ | Stable → | Rising ↑ |
|---|---|---|---|
CHEAP < 15x | Panic / capitulation | Base building | Bear-market rally |
FAIR 15x – 20x | Correction | Range-bound | Healthy advance |
EXPENSIVE > 20x | Distribution | Narrow leadership | Melt-up |
💡 High & rising ≠ healthy. High & stable is often the most dangerous state. Based on Shiller's 10-year cyclically adjusted earnings.
7. Earnings Yield Premium Matrix (Shiller)
Shiller Earnings Yield (E/P) − 3M Treasury — Equity risk premium vs cash using CAPE
| Level | Falling ↓ | Stable → | Rising ↑ |
|---|---|---|---|
NEGATIVE < 0% Bonds more attractive | Valuation compression | Bonds dominate | Equity selloff |
NEUTRAL 0% – 2% Fair compensation | Premium erosion | Balanced | Premium expansion |
POSITIVE > 2% Equities attractive | Normalization | Equity advantage | Deep value |
💡 Negative premium = equities expensive vs cash. Positive premium > 2% = equities attractive vs risk-free rate. Based on Shiller CAPE.
8. Real Earnings Yield Matrix (Shiller)
Shiller Earnings Yield (E/P) − CPI — Real equity return potential using CAPE
| Level | Falling ↓ | Stable → | Rising ↑ |
|---|---|---|---|
NEGATIVE < 0% Negative real return | Inflation surge | Real loss | Multiple compression |
LOW 0% – 3% Low real return | Real erosion | Modest real return | Real improvement |
POSITIVE > 3% Attractive real return | Disinflation boost | Strong real return | Value expansion |
💡 Real earnings yield shows inflation-adjusted return potential. Negative = equities losing to inflation. Based on Shiller CAPE.
Compact View
A condensed view with historical date selection
Regime Matrix Snapshot
Inflation & Real Rates
Equity Valuation (Shiller P/E)
Equity Valuation (5-Year P/E)
Interactive Timeline
Drag the timeline to explore historical regime data · month-end values