Trends in Macro Variables Support Trends in Prices

 

There are trends in price because there is a slow response to new information about the drivers of valuation. A response to new information is often immediate, but it may not always be complete. When there is more uncertainty about new macro information, there is a slower response to these macro trends.

There are also trends in macroeconomic information because the collected information on the business cycle and policy responses often shows a slow adjustment processes. Central banks are often cautious with their actions, and they make forecast mistakes. Policy adjustment will not be immediate to the macro environment. In tracking macro variables, the adjustments of macro sectors take time. For example, the housing sector of the economy does not just adjust to rates immediately. It is a process that takes time, so the impact on financial prices will also take time. Unemployment may be lagging indicator and show a slow adjustment to slower economic activity.

Being more specific, increases in GDP will have a positive impact on equities, currencies, and commodities and a negative impact on fixed income. Inflation will have a positive impact on commodities but negative impact on fixed income. Monetary policy as measured by rising short rates (2-year) will have a negative impact on traditional assets. Trends in macro variables have an impact on the tilt in trends for financial assets or put differently, they will have additive uncorrelated signals that can reinforce price trends or provide unique signals. See "Economic Trend".

The global macro perspective for trend-following states that following trends in macro can enhance the trends found in prices. Global macro trends can be followed by asset class, macro themes, or as combination. In all cases there is value in using macro signals. This is especially the case when economic downturns are identified. Use macro signals to avoid drawdowns in equities and fixed income.

While the premise of macro trends is that they provide better insight on price trends, the two signals are not always correlated and their drawdowns may not occur at the same time. Macro change points will not occur when prices peak or bottom. Hence, there is diversification benefit from holding a diversified portfolio of price and economic trends.

If you are worried about equity and fixed income drawdowns and you are worried about the risks from holding a price-based system, a holding a combination portfolio of price and economic trend signals will be supportive and rational as a diversification strategy.