While some investors focus on analyzing individual companies or sectors, macro investors take a broader view. They examine the economy as a whole, focusing on large-scale economic factors that have a ripple effect on various asset classes, including equities (stocks), fixed income (bonds), currencies, commodities, real estate, and crypto.

A macroeconomic top-down approach begins with an assessment of the overall economic environment and then drills down to sectors, industries, and finally individual assets, and their quantifiable attributes or "factors".

Understanding the transitions between different phases of the business cycle and different cycle regimes is essential for successful investing as they have a broad impact on many different types of investments.

Key Aspects of Macro Investing

Growth + Inflation + Interest Rates

The Business Cycle

Growth, Inflation, and Interest Rates. The interplay of these elements results in distinct situational conditions within the business cycle, each affecting different types of investments in unique ways. Four primary conditions can be isolated for their influence on asset classes, yielding both favorable and unfavorable outcomes. The four conditions are: Goldilocks, Reflation, Stagflation, and Deflation. We break down each of their distinct characteristics below.

Goldilocks

Growth Accelerating, Inflation Decelerating: This is often considered an ideal situation. (GDP) Growth is increasing, jobs are being created, but inflation is not a concern. Major stock indices and most risk assets tend to perform well. Businesses may look to invest and expand, given the favorable economic conditions. Investors might focus on growth stocks. Maximum risk is often taken during these conditions and riskier assets tend to outperform.

Reflation

Growth Accelerating, Inflation Accelerating: Both the economy and prices are heating up. While growth is strong, rising inflation can erode real gains. Major stock indices tend to perform well. Central banks may look to raise interest rates to control inflation, which could impact borrowing costs. Investors might consider assets that perform well in inflationary environments, such as commodities.

Stagflation

Growth Slowing, Inflation Accelerating: This is a troublesome combination often referred to as "stagflation." The economy is not growing quickly, but prices are rising, creating a squeeze. Exposure to riskier assets is usually reduced substantially in this environment. Businesses may find it difficult to pass increased costs onto consumers, impacting margins. Investors may look to defensive or non-cyclical sectors.

Deflation

Growth Slowing, Inflation Slowing: Both economic growth and inflation are decelerating, often indicating a cooling or contracting economy. This is a risk-off environment. Stock indices tend to perform poorly. Equities and other high-risk assets can suffer large drawdowns. Central banks may reduce interest rates or implement quantitative easing to stimulate growth. Investors may shift towards bonds or other low-risk assets.