Excluding of course the intoxicating world of politics and policy, especially in this presidential election year, about 90% of what the financial media talks about is “macro.” The term is shorthand for macroeconomics, the study and analysis of big-picture conditions like GDP growth, inflation, interest rates, currencies and such.
Try this experiment: in a typical day, count how many macro discussions you come across – in digital or print media, social media, radio, podcasts, broadcast, meetings or other sources. Assess for yourself whether the 90%-of-content ratio is right. The analysis alone might be well worth the time spent.
Everyone talks about macro. Not only is the publicly accessible media obsessed with macro, the behind-closed-doors world of clients, consultants, research analysts and other private conversations share this preoccupation. Likely dominating the discussions today are questions like: “Given the Fed’s recent comments, how many rate cuts do you see this year?” “Government data are suggesting a soft landing is possible – is this right or will we slide into recession, and if so, when?”
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To support their credibility, most investment brokerage firms, fund managers, research outfits and financial media firms have well-paid and highly credentialed economists on their staff. Those without in-house expertise will almost invariably subscribe to macro research. The goal: to better understand the current macro conditions and prognosticate where they are headed.
Macro is fun and easy to talk about. At a high level, the concepts are easy to understand, and anyone can have an opinion. Who doesn’t have an opinion about the state of the economy or where it is headed? Experts, for their part, will delve deep into government statistics and other data in an effort to understand macro conditions and provide reassuring or (perhaps) alarming outlooks for economic growth, unemployment, interest rates and other macro trends.
With investing, however, what is easiest to talk about is usually the hardest way to make a profit. Few if any investors can reliably make profits from their macro opinions. Some hedge funds say they focus exclusively on macro, and a few sometimes make splashy profits. But the underlying source of those splashy profits is likely not from accurately forecasting macro conditions (although a few lucky guesses never hurt), but from making successful bets against extremes in prices of specific securities which then revert back to normal.
What makes profiting from macro so difficult? The answer is straightforward: our economy is too complex. We have over 350 million consumers, probably a million companies, a deep interaction with the global economy and countless other variables. There is simply no comprehensive way to fully identify and understand these components, much less accurately predict how they will intermix in the future.
While data offer a useful framework, they can’t possibly fully capture the underlying trends. Data is based on samples and assumptions, not a full collection of every relevant data point. And, even if the data achieved this impossible goal, few could agree on what they mean. Today’s focus on the inflation rate is a good example: widely followed inflation metrics include headline CPI, CPI excluding food and energy, headline Personal Consumption Expenditure (PCE) inflation, core PCE and core PCE Services inflation ex-housing, among others, all of which are subject to adjustments including base effects and outliers.
What does work in making profitable stock investments? A focus on company-level fundamentals and the share’s valuation. What is the company’s strategy, and how sensible is it? Does the company have the means to successfully execute? How relevant are its products and services, and how profitable? Does the management know how to steer the company? Is the balance sheet strong enough to support the company? Are the shares reasonably priced?
The best use for macro is to develop a broad context for the investing environment. Is the economy operating at extremes in inflation, growth, employment and other macro conditions, or is it somewhere in the middle of its typical range? Are trends clearly moving in a major way toward one extreme or another, or are trends too murky to discern? At this level, one spends a minimal amount of time but can capture the general picture of conditions. That’s probably plenty.
One other use for macro? It makes for great conversational fare at social events. But, once back at the investing desk, focus on company-specific details.
As value and contrarian investing specialists, we focus on specific stocks of companies that have “the right stuff.” We do all the extensive idea searching and analysis to help you benefit from out-of-favor stocks. Our capabilities save you time while boosting your chances of profitable investing.
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