When allocating to investments, understanding the dynamic relationship between macroeconomic and microeconomic factors is crucial. While microeconomic investing focuses on exposure to individual companies, macroeconomics examines broad economic trends, indicators and events that influence entire markets. Understanding the different elements can be helpful for investors especially when portions of the public markets, including individual stocks, move lower on good fundamental news related to earnings or other positive announcements. As experienced recently, there are times when the “winds of change” cause the macro backdrop to take precedence over micro factors which can impact the stock market.
Macroeconomic significance tends to rise during periods of economic uncertainty or significant policy shifts which is often why markets tend to have more directional volatility during interest rate cycles. Whereas past Federal Reserve Board members were more discreet in the free flow of opinions, the Fed in this period have been more transparent in their messaging. This transparency should be a positive, but economic conditions can change quickly causing investors to second guess the Fed’s next move in interest rates, a key underlying factor driving the money flow in and out of the publicly traded markets.
As macroeconomic uncertainties loom large, market volatility often spikes as investors grapple with the implications for their portfolios. Economic indicators such as GDP growth, inflation rates, unemployment figures and geopolitical events become critical drivers of market sentiment. Adverse developments in these macro areas can create headwinds for stocks, causing sell-offs due to increased risk aversion. Case in point, the highly followed Chicago Board Options Exchange Volatility Index (VIX), an up-to-the-minute market estimate of the expected volatility of the S&P 500 Index over the next 30 days, recently made a 45% upward move from the 13% level to 19%. The rise in this sentiment indicator reflected the expectation that price swings in U.S. large-cap stocks would become more dramatic. The good news is, whereas the 13% level was low versus history, the 19% level is near the long-term average.1 In our view, this movement partly correlated with a realization by investors that the Fed is indeed less interested in lowering the Federal Funds interest rate now than communicated during late 2023.
In contrast to the macroeconomic headwinds, certain aspects of microeconomics, specifically earnings results from public companies, can function as a ballast. While companies can’t control the macro, they are driven by incentives which affect the distribution and utilization of company resources designed to drive positive earnings outcomes. The strongest companies are often able to maneuver through the macro environment to deliver impressive earnings results over an elongated period. In the recent period since Q3 2023, we have seen a resumption of earnings growth in the S&P 500.2
Although investors often ignore macroeconomics when choosing investments, we find it important to track both macro as well as the micro. Keeping an eye on key economic indicators and central bank policies can provide valuable insight into the market, helping us judge when sentiment has swung too far in either direction. To further mitigate the effect of rising volatility, we are also strong believers in diversifying across asset classes and sectors which can help provide portfolio stability.
Without a crystal ball, it is impossible to say if the macro conditions will calm down or heat up, but we will continue to seek investments in companies which have shown the ability to make good business decisions over time. Should sentiment swing too far south, we might get the opportunity to take advantage by adding exposure in best-in-class companies at attractive entry points.
Sources:
1 - www.investopedia.com/terms/v/vix.asp
2 - https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_041224.pdf
This content was produced and provided by an unaffiliated third party entity. We are providing this video as a convenience only and such provision does not imply that Sand Hill or any of our employees, officers, or directors endorse, sponsor, approve, or guarantee any content in this video. Please also reference this chart, which should be reviewed prior to or contemporaneously with the video. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of securities listed in the chart.
Articles and Commentary Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA. For disclosures, including additional information on credential designations of SHGA representatives please see our Form ADV Part 2A and 2B Disclosure Brochures, which can be obtained by clicking here: https://www.sandhillexperience.com/advform
Video Presentations All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
