Portfolio 033 – Macro is Back, With a Vengeance

This post first appeared at Exante Data’s Money: Inside and Out.

You may not be interested in macro, but macro is interested in you.

The performance of the equity market in the first half of 2022 was the worst in several decades. The S&P 500 fell 20.6%, its worst first half since 1962. And the Nasdaq Composite fell 29.5%, its worst first half ever. These declines were primarily driven by macroeconomic factors—as was the surge that took place in 2020-21—a reality that is at odds with the bottom-up approach favored by most fund managers and analysts. 

In fact, a generation of fund managers have come of age during a period that was exceedingly favorable to equity investing. The context for investing was very stable: the demographic dependency ratio was falling while the population was growing; US institutions were functioning well; there were no large and imminent foreign threats after the fall of the Soviet Union; inflation was tame and interest rates were falling. And if, as happened every now and then, this ideal equilibrium was briefly disrupted by a crisis that hobbled markets, the Fed was always standing by at the ready to intervene and provide the necessary fuel to reignite the economy’s animal spirits.

As a result of this best-of-all-worlds configuration, it became normal for many to view the macro context as fixed and therefore as close to irrelevant to analysis. Prominent investors, pillars of the investment business, encouraged this view by downplaying the importance of macro in their own processes. The great Peter Lynch, the doyen of mutual fund equity investing, famously stated that “if you spend 13 minutes a year on economics, you’ve wasted 10 minutes.” And Warren Buffett was expansive on the subject in a 2014 CNBC interview:

My partner Charlie Munger and I have been working together now for 55 years. We’ve talked about every business you can imagine, and stocks. We’ve never had one decision that involved a macro factor. This doesn’t come up. If I talk to Charlie about [some companies], we don’t get into macro. It just doesn’t make any difference… We really don’t care whether the Fed is going to increase interest rates 100 bps or 200 bps next week.Continue reading at Exante Data >>>

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