Macro Matters

A nod to The Fat Pitch blog for an excellent reminder of why macro still matters.  In an age of fast money and high-frequency-trading, macro considerations may seem too slow and antiquated to be relevant.

But as I wrote in my very first post (and many times since), it would behoove us to remember that financial markets are driven by macro-level forces, not the other way around.

When in doubt, just look at the data.  The chart below is a good visual.  It shows quarterly returns for the U.S. stock market and U.S. recessions from 1972 to 2017.  There were six recessions during this period and every single one coincided with a major stock market decline. Coincidence or very real correlation? Macro matters.

fredgraph

But that’s easy to forget when volatility picks up.  Especially when people have grown accustomed to low volatility and easy money, the sudden return of market chop is startling.  According to Lipper, this past week was the second worst in 2018 for net equity fund outflows.

Since drawdowns of 10% are well within the normal ebbs and flows of market movement, this is likely an overreaction.  However, that still begs the question “which 10% correction cascades into the next major bear market?”

Impossible to know for certain, but if history is any guide, an understanding of macro conditions is still the most reliable way to differentiate bull market corrections from full-blown bears.  So long as economic conditions remain healthy and the business cycle continues to expand, it’s unlikely the market deteriorates into a major meltdown.

I’m not saying it’s not possible, with markets anything can happen.  I’m also not saying US stocks look like a bargain (they don’t).  I am saying it’s important to keep your eyes on the big picture to avoid overreacting to the blinking lights on your monitors.   I’m saying macro matters.

Victor K. Lai, CFA

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