The frustrations of global macro

As a multi-asset management house, we have to be across what is known commonly as “the macro” – big ticket items like interest rates, their direction, inflation, GDP, geopolitics, government spending etc. However, whilst these things make for great market conversation and can cause some very healthy debates, they’re frustrating for 2 reasons:

1. It’s almost impossible to forecast macroeconomic data. Even the best global macro strategists generally get it right about 50% of the time; and
2. It actually rarely matters.

The first point is self-explanatory, but the second you may find surprising. Let’s look at the last 25 years to explore these points.

What ‘macro’ events have caused major market moves?

• In 2009, the drop in interest rates and bank bailouts, along with Quantitative Easing, ended the fall of markets because of the GFC, and pulled the economy out of recession.
• Two years later we had the Greek (or European) debt crises.
•  In 2013 we had the ‘Taper Tantrum’ (when bond markets went nuts over comments from Ben Bernanke hinting at reducing the accommodating policy of the Federal Reserve).
• In 2015, around August, we had the Chinese Renminbi revalued by the Chinese Government (which coincidentally, we believe but can’t prove, coincided with Vanguard making a change to their index makeup).
• In Q4 2018 we saw markets freak out because of the trade war between Donald Trump and China.
• Then 2020 came along – which was not government or central bank caused, but the response to it certainly was, causing one of the sharpest market falls and rebounds in history.
• Then came 2022, when inflation became the problem and hiking interest rates the solution.
• Finally, in 2024 we had the Bank of Japan (BOJ) raise interest rates, causing a 15%+ fall in a heavily overleveraged equity markets within days, followed again by one of the sharpest reversals in history.

We are not economists. We don’t pretend to be economic experts, but we do generally know more than the average person on the street. Some economists may disagree with us that these were the only big turning points of the last 25 years – but as you can see from the illustration, the ‘macro’ only matters for markets, about once every 2 years. Unfortunately, right now feels like one of those times.

From October 2023 US equities, particularly tech, ripped higher under the assumption of 7 rate cuts happening in 2024, and optimism over a hail Mary AI story. We’re now in September without a single cut and the market is still trading near all-time highs – obviously those 7 rate cuts weren’t happening, but the market didn’t seem to care. At home in Australia, we’ve seen earnings falling (on the ASX in aggregate), yet the market is flirting with all-time highs? Why would the market be higher if not only earnings are lower, but FORECAST earnings are lower? This doesn’t make sense to us.

So, what about now? Unfortunately, we can’t prove this quantitatively, but intuitively it feels like we’re in a regime where the macro will have an outsized effect on markets. So, what’s the rub? Back to point one – it’s pretty much impossible to forecast. We prefer to use market data, valuations, earnings trend, volatility, dividends, coupon yield – real things that can be measured and compared through time to frame portfolio construction decisions – we are not the kind of group that places bets on when central banks will cut rates and by how much. It’s also significant to note that it’s not necessarily about what you think will happen in macro, but rather what’s actually priced into asset markets. If you’re a bond trader and hold a “strong” view that the economy is going into a mild recession – you’re too late – bond markets have your view priced into them. So, for there to be any trade, you need to be even more pessimistic than the bond market, otherwise you cannot act on it.

So, we will stick to our knitting, but with a very close eye on the macro looking for any catalyst – as it just feels like one of those moments is coming – good or bad – when the macro will be the main driver.