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Economic Analysis

Macro Analysis and Capital Markets

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The macroeconomic analysis of capital markets has limited effectiveness, except for commodity trends, where there is reasonably good potential. Investors could be better off following simple technical indicators when the objective is to minimize pain during bear markets.

Macroeconomic analysis is valuable to economic policymakers. However, in the markets, this type of analysis has not been effective. A notable example is the consensus among economists that, after quantitative easing started, inflation would rise to high levels; this is what the models were forecasting. By late 2010, many investors and funds expected bonds to crash. In 2011, those who shorted the market faced devastating losses as the 20+ year bonds surged 34% on a total return basis. Then, in 2014, bonds surged 28%.


S&P US Treasury Bond 20+ Year Total Return Index. Yearly Series from Norgate Data.

The fixed-income market is an interesting case. There are two bosses: the central bank and the Treasury. Anyone who goes against them faces significant risks. Equities are a different story; there, reflexivity reigns supreme, and passive investing amplifies it.

When it comes to the equities market, the problem with macro analysis is that the value is in forecasting bear markets and large corrections. This provides investors with the opportunity to reduce exposure and then average down to attractive levels to maximize returns. There is not much value in macro analysis that constantly forecasts tops or continuing uptrends. Permabear forecasters are quickly ruined if they attempt to short the markets. Permabulls, on the other hand, do not offer value because it is well known that the stock market has an upward bias, at least up until now.


Yearly S&P 500 Chart with Histogram of Returns. Data: Norgate Data

The S&P 500 has been up in 58 years of the last 80 years, or 72.5% of the time. Given that annual returns are approximately normal (after the Great Depression), the odds of an up year are 2.6:1. With these winning odds, a bullish macro analysis is unnecessary. Given that passive investing and reflexivity are the main factors influencing stock prices, macroeconomic analysis has a poor track record of predicting bear markets.

Predicting commodity trends necessitates forecasting demand and supply. This is a difficult and very specialized area. However, most investors avoid commodities due to violent booms and busts. Nevertheless, this is a market where macroeconomic analysis can add value.

As most experienced traders and investors know, trying to forecast exchange rates is an exercise in futility due to political decisions, central bank interventions, and stochastic capital flows.

The table below lists the main drivers and effectiveness of macro analysis in the case of four capital markets.

Market Main Drivers Macro Analysis Effectiveness 
Equities Reflexivity (Investors) Very Low
Bonds Interest rates and Supply (CBs/Treasury) Limited
Commodities Demand and Supply Reasonably good
Exchange rates Political Decisions (G-7) Very Low

We need to try to answer the following question: If macroeconomic analysis has limited effectiveness, why is it so popular? We can make some hypotheses here:

  • Macroeconomic analysis provides a narrative to justify discretionary decisions.
  • Macroeconomic analysis provides a false sense of understanding very complex systems.
  • Macroeconomic analysis is jargon-rich, and that creates the impression of a rigorous method.

Simple technical indicators can be of value to those who are risk-averse and seek better risk-adjusted returns when investing in the stock market. See this article for more details. 

Even in the case of commodities and fixed income markets, but also forex markets, trend-following with simple indicators has proven to work reasonably well and has provided solid risk-adjusted returns over the years. Click here for an example and a discussion of the risks. 


Macro analysis is useful for economic policymakers but has limited effectiveness in capital markets, other than possibly commodities. Under certain conditions, simple technical indicators and trend analysis based on price have the potential to provide reasonable risk-adjusted returns, but they cannot guarantee performance either. In the case of equity markets, the value of macro analysis is in forecasting bear markets, but this is challenging due to a lack of sufficient samples, changing economic conditions, and a dominant reflexivity dynamic.

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Specific disclaimer: This report includes charts that may reference price levels determined by technical and/or quantitative analysis. If market conditions change the price levels or any analysis based on them, we will not update any charts. All charts in this report are for informational purposes only. See the disclaimer for more information.

Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

Charting and backtesting program: Amibroker. Data provider: Norgate Data

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