AI, Macro And Mega Trends: How To Sort Out The Big Picture

This is a part of a transcript of a conversation between Jeff Black, VP of Content and Education at Tornado, and his guest John Normand, in March 2023.

John is a cross-asset strategist who spent over 25 years at JP Morgan heading research for foreign exchange, international rates and commodities. He was also head of cross-asset strategy. The following is not investment advice and all views John expresses are his own.

What Is “The Macro”?

Macro, or economy-wide influences, can be broken down into cyclical and structural factors.

Cyclical influences are those that ebb and flow over horizons of maybe one month to one or two years. These include the rate of overall GDP growth, the rate of inflation, and the level and volatility of interest rates, exchange rates and commodities prices. They also include political risks and opportunities presented by elections, and geopolitical risks presented by international conflicts.

Structural influences unfold over 5, 10 or 20 years. These are allegedly less sensitive to what occurs over the business cycle. (I will return to this point about sensitivity later in the podcast.) These are generally mega trends that relate to technological disruption, climate change, globalization and de-globalization, demographics and economic development.

How Does Macro Influence Stocks?

Not all of these factors are material for every company and every equity sector. But for an equity investor to formulate a complete view of opportunities and risks, it’s important to know which macro issues matter, and to track them alongside company fundamentals.

The cyclical sectors — Materials - that’s included in the Materials Select Sector SPDR Fund XLB, Industrials, Industrial Select Sector SPDR Fund XLI, Consumer Discretionary, Consumer Discretionary Select Sector SPDR Fund XLY and to some extent Energy, Energy Select Sector SPDR Fund XLE are highly geared towards the rate of global growth and interest rates.

The opposite holds for Defensive sectors. These could include Utilities, Utilities Select Sector SPDR Fund XLU, Staples, Staples Select Sector SPDR Fund XLP and Healthcare, Healthcare Select Sector SPDR Fund XLV.

Technology, Technology Select Sector SPDR Fund XLK and Communication Services, Communications Services Select Sector SPDR Fund XLC are in the middle. They may benefit from structural mega trends like technological disruption. Yet they tend to be harmed by de-globalization (if it happens quickly) and rising interest rates.

The challenge for stock investors is figuring out what broad forces matter for their stocks, and then netting these factors against company-specific fundamentals.

What About The Business Cycle?

There is also a pronounced difference in equity performance in particular business cycle environments. For example, during an earnings recession, a period in which corporate profits growth is negative but the economy overall is growing and unemployment is stable, the S&P might experience a 10% to 15% peak-to-trough drawdown.

During a broader GDP recession, in which GDP growth is contracting and unemployment is rising by at least 1 percentage point, the equity drawdown may be about twice as large (25% to 30%). These intra-year losses may not matter to a long-term investor since stocks tend to rise in about 8 of 10 years. But for a more tactical investor who relies on trading profits to fund other activities (like their consumption), these sorts of moves are quite material and may be worth trying to time.

You can find the original audio / blog, and a range of others, at Tornado.com

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