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– Madeline St.Clair, Assistant Managing Editor
Like many investors, I spend a lot of time thinking about macro-level events and how they impact investing.
These macro events are the big-picture factors that drive the global economy.
They include the oil price, the state of the U.S. dollar, U.S. Treasury yields, the level of the S&P 500 and the price of gold… to name a few.
Analyzing these factors makes for the three-dimensional chess game of “macro investing.”
And the players in the never-ending game are some of the brightest minds in finance.
But the question arises: Is any of this analysis worth it?
That’s the question I asked myself last week.
I had just finished listening to yet another episode of MacroVoices, a podcast targeted at sophisticated investors that – as the name suggests – tracks the macro events that drive global financial markets. (You can listen to that episode here.)
Each week, a remarkably articulate guest shares their wisdom on today’s state of play. And often they offer listeners a 50-to-200-page chart deck to support their views.
The amount of work that goes into compiling these decks is simply staggering.
But this past week, I realized something…
Listening to Macrovoices was much like when I followed baseball as a kid.
I’d follow the progress of my home team’s players.
I’d collect baseball cards and dig deep into the weeds of statistics.
I’d debate which team was going to the playoffs with my friends.
Turns out, my pursuit of market insights as an adult has been remarkably similar.
But what impact has this had on my investing?
Well, if anything, the impact has been negative.
In macro investing, so many confounding factors make it hard to make correct “calls” on anything.
Every decision is just a (overeducated) guess.
And once again, I found myself returning to the wisdom of Warren Buffett’s sidekick, Charlie Munger. He observed…
Microeconomics is what you do. Macroeconomics is what you put up with.
What Macro Investors Tell Us About Today’s Market
Let’s see how macro analysis applies to today’s investment environment.
Global financial markets are in turmoil. And by most accounts, it’s going to get worse.
We know that easy fiscal and monetary policies spell trouble in the long run.
First, there is inflation.
And as Milton Friedman observed, “Inflation is always and everywhere a monetary phenomenon.”
Second, low real interest rates lead to “capital misallocation.”
People start wasting their money on nonproductive assets like cryptocurrencies and nonfungible tokens (NFTs).
Third, growth or “disruptive” stocks are susceptible to moves in interest rates.
When rates rise, growth stocks crash. Just look at Cathie Wood’s Ark Invest.
Fourth, long-term market valuations revert to the mean.
Take the Buffett Indicator, which measures the ratio of the total U.S. stock market valuation to GDP.
As of June 24, 2022, the Buffett Indicator stood at 171%. That suggests the U.S. stock market has shifted from “Overvalued” to “Fairly Valued.” But just barely.
Another well-known measure, the long-term Shiller P/E (price-to-earnings) ratio, still stands at about 30 – compared with its long-term level of around 17.
That means the market is still hugely overvalued.
What About the Bear Market?
U.S. stocks are firmly in bear market territory.
The Nasdaq, weighted toward technology stocks, got there a while ago.
And the S&P 500 fell more than 20% from its high at the start of 2022 – though it has recovered somewhat in the past few days.
The main question on investors’ minds right now: When will the bear market end?
History tells us a lot about how bear markets tend to pan out.
Now, history does not repeat itself. But it does rhyme.
So let me regale you with some statistics.
According to Bank of America’s Michael Hartnett, stocks lose around 37% during the average U.S. bear market. And they last nine months.
Assuming this one follows that pattern, the S&P 500 will bottom out at around 3,000 in October 2022.
That’s down another 24% or so from current levels.
Unfortunately, a deeper look into the data shows that this average hides a wide range.
Each bear market is different.
Let’s take the last 20 years or so.
From the peak in March 2000 to the bottom in October 2002, the S&P lost nearly 50%. And it took more than 2 1/2 years to do so.
The financial crisis of 2008 was one for the history books. But the market’s 57% drop was over within 18 months.
The near-bear markets in 2011 and 2018 lasted fewer than six months.
And during the pandemic crash, stocks recovered in just over a month.
So based on the last 20 years, the current bear market will end in…
Well, no one has any idea.
Detailed analysis notwithstanding, today’s predictions are next to worthless.
A single unexpected future event could derail any projections.
As an example…
In 2022, no Wall Street projection for the stock market incorporated the risk of Russia invading Ukraine.
Yet this black swan event has been the most critical factor in macro investing.
So with this much uncertainty, how does the average investor cope?
Follow Charlie Munger’s advice and ignore the macro numbers.
And we’ll continue to provide you with the best course of action as this plays out.