Broaden Your Perspective
What Is Macro?
Macro analysis is the study of big-picture trends that influence markets and economies.
Monetary policy is the ultimate indicator of trends in the business cycle. The fed funds rate, which influences all other interest rates, is the common denominator in all U.S. expansions and slowdowns. History shows that it takes about 18 months for changes in the fed funds rate to be reflected in leading indicators, like equities. It takes another six months or so for these changes to be reflected in GDP growth.
There’s a maxim in the financial industry that says successful investors, like great hockey players, need to play not where the puck is, but where the puck is going. While the equity market is a leading indicator of the economy, how do investors figure out the future path of stocks?
Why Has Macro's Influence Become More Pronounced In Recent Decades?
The influence of macro increases as holding periods for stocks decline.
Investors have become increasingly short-term focused in recent decades. Macro analysis has gained in importance as holding periods are now shorter than a full business cycle.
A long holding period MITIGATES the impact of the business cycle on stock selection.
Macro is often perceived as unimportant for equity investing. This may have been truer several decades ago when the average holding period for stocks was five to eight years and covered more than a full market cycle.
A short holding period MAGNIFIES the impact of the business cycle on stock selection.
Over the last several decades the average holding period for stocks has fallen to about one year. This shorter time horizon greatly increases the influence that macro trends can have on a portfolio.