July 31, 2022

Macroeconomics is the branch of economics that studies how an overall economy, the markets for different goods , labor and assets behave. As the term implies, macroeconomics is a top-down process that looks at the overall, big-picture performance and overall state of the economy. Macroeconomics attempts not only to measure how well an economy is performing, but also to understand what forces drive it and how government policies can help achieve the desired objectives. The information generated by the economic analysis may help investors make better decisions. It will do so to the extent that it provides a more thorough understanding of the effects of broad economic trends and policies on their own industries are generated by the macroeconomic analysis. Macroeconomists have developed models exploring the relationships between policy variables and the economy’s market clearing prices and quantities. This analysis is the foundation of a top-down portfolio strategy. A crucial point to make regarding the interpretation of the data and the various economic models is that the role of government in the economy is not uniformly shared. Over the years economists have developed different macroeconomic theories regarding the role of the government. In principle, these economic theories can offer illuminating insights on how economies function and the long-term consequences of particular policies and decisions. It can be invaluable to understand which theories are in favor and influencing a particular government administration. The underlying economic principles upon which designs its policies says much about how that government will approach taxation, regulation, government spending, and similar policies. By better understanding the economic orientation of the administration , investors can get at least a glimpse of how this administration will react to different disturbances and determine the government’s probable future and act accordingly. The first step in the development of a macro driven portfolio strategy , which we discuss today, is to develop a simple framework that allows to generate forecasts of the economy’s market clearing prices and quantities. The focus of macroeconomists and investors is quite different. Macroeconomists are mostly concerned with developing policies that achieve desired policy objectives such as price stability, full employment. Investors and portfolio managers focus on achieving the highest possible returns for their clients. Hence for macroeconomists and investors their information gathering focus is aligned. For both groups it is important and worthwhile to keep track and forecast the major macroeconomic indicators like GDP, inflation, and unemployment. The performance of companies, and by extension their stocks, is significantly influenced by the economic conditions in which the companies operate. The macroeconomic statistics can help an investor make better decisions and spot turning points. The second step , which we will discuss in our next delivery , details how changes in these variables impact the valuation of different assets, i.e., short, and long bonds, large and small caps, value, and growth stocks, as well as domestic versus international stocks, among others. variables. The change in valuation allows us to assess the changes in absolute and relative rates of return of the different assets. Armed with this information , in a third delivery, we then combine it with the capital asset pricing model CAPM and outline a macroeconomics modified CAPM portfolio strategy.

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