There are many different investment styles. Some come in and out of favor while others sustain longer lives with minor tweaks to adapt to a changing market climate. There are investors that develop computer algorithms that trade based on historical statistics (quantitative), others that seek to exploit pricing mismatches that occur around a pivotal event (event driven), fundamental investors that buy-and-hold (long only), and investors that establish positions based upon broad economic data and central bank policy (macroeconomic, or “macro”). These latter investors are what we call the “market weathermen”. They’re trying to determine if it’s going to rain or shine for all different types of asset classes, ranging from stocks, bonds, currencies, commodities, etc.
While macro investing was arguably one of the most popular styles decades ago, it has fallen from grace over recent years. There have been a number of high-profile macro funds that have closed over the past decade due to poor performance. This begs the question – does following macro data do more harm than good in the modern age?
Macro data is the primary focus of financial media. It effects our everyday lives, ranging from interest rates, inflation, wages, employment, economic growth, etc. It’s newsworthy. However, it’s become less useful for investing for several reasons, in our opinion. First is increased central bank intervention since 2008. It seems that whenever the economy or parts of it get into trouble, the Fed or the government steps in to ease the fallout. Setting aside the discussion whether “bailouts” are right or not, it hurts the macro investors that were positioned for such an economic event. Secondly, secular winners, or firms that benefit from unique drivers more than cyclical factors, now make up a large part of the S&P 500.
While macro investors can dissect all the stale government data that they can grab, it just doesn’t mean as much for directional market predictions when there’s massive innovation and shifts in market share benefiting the largest components. While this is happening with artificial intelligence now, we can point to several periods in the recent past where a similar thing occurred with mobile phones, e-commerce, cloud computing, digital advertising, etc. Lastly, macro data has been commoditized in the informational age. Anyone with an internet connection can access data instantly, taking away any “edge” that macro investors may have had decades ago.
As we’ve said before, don’t confuse the stock market with the economy. It’s important to know what the weather will be like outside but that usually doesn’t keep us indoors.
The opinions expressed are those of Harrison Financial Services as of June 13, 2024 and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested.