A pure countercyclical indexing strategy would ideally be systematic and involve no discretion across time as to the allocation. It would be run just like a standard indexing strategy with the exception that you aren’t rebalancing back to a fixed allocation, but instead rebalancing back to whatever the CI model says. That’s how I manage it. My opinion of the economy or markets across time have no impact on its output. It’s designed in a way that it could be 100% systematic so you take all forecasting and discretion out of the management.
A strategy involving recession prediction would entail a regime switching approach. I’ve always been intrigued by this strategy for someone who was very aggressive. For instance, let’s say you’re 25 and you know you have a super long time to leave the money in the stock market. You’d construct a 100% global equity allocation and let it ride. But let’s say you are also concerned about huge 2008 style events and worry that they could ruin your financial life. In that case you could implement a regime switch which would involve changing the allocation only temporarily when recessions occur.
Of course, the kicker is that you have to be able to predict the recession there which will sound silly to most people. It involves discretion and a predictive model which is something that isn’t proven to work well. So, it interests me, but I would be lying if I said I wasn’t skeptical of the approach. I mean, I have my own recession models, but I have no idea if they will work consistently. Still, if you think of it like insurance it might be better to have a bad model that works some of the time than no model at all which exposes you to disaster or behavioral bias….
Personally, I prefer the pure CI approach. No discretion is the higher probability outcome in my opinion.