This page has been archived and commenting is disabled.

'Micro' Equity Focus Is Shifting To 'Macro' Bond Reality

Tyler Durden's picture





 

Fixed income markets have always focused closely on news about the US macro-economy; while traditionally, equity market participants have focused more on the “micro” data – in particular, news about current and prospective corporate earnings – to form their views about the relative attractiveness of different stocks or the market as a whole. Goldman finds that the financial crisis changed all that. The responsiveness of the US equity market to economic news increased dramatically, now showing about twice as much sensitivity to macro data as it did in the years before the financial crisis. While micro data remains important - especially in quantifying just how much QE-hope the market is 'abiding' by, macro news is likely to be the critical driver of equity markets until the global economic outlook is considerably brighter than it looks today (or macro decouples from Fed/ECB jawboning). On average the market’s responsiveness to all these economic indicators suggests that we are still very much living in a macro world. In the meantime, there are some exceptions to the fairly consistent reactions to economic news that we see between equity and bond markets.

 

Goldman Sachs: Economic News and the Equity Market

Traditionally, equity market participants have focused more on the “micro” data – in particular, news about current and prospective corporate earnings – to form their views about the relative attractiveness of different stocks and about the market as a whole.

While equity market investors were certainly well aware of the major economic releases, they were often seen as just one part of the “mosaic” of information gathered by investors rather than a central driver of markets.

The financial crisis changed all that. The responsiveness of the US equity market to economic news increased dramatically during the crisis and has remained high since (Exhibit 1).

 

Assessing the Market Impact of Economic Data

The equity and bond markets show fairly consistent reactions to economic news, with a couple of notable exceptions. Stronger-than-expected news about growth pushes up both equity prices and bond yields, but stronger-than-expected news about inflation has the opposite impact on the equity market.

 

Bond markets appear to be more attuned to business survey data and relatively less responsive to news about consumer confidence or GDP. This is portrayed in Exhibit 4, in which the vertical axis measures only the average absolute response of the equity market to each indicator (i.e. we reverse the sign on the inflation data) and omits NFP.

 

Market Focus Varies over the Cycle

In general, the equity market appears to have shifted its focus in intuitive ways:

  • News about housing activity was extremely important as this sector of the economy collapsed in 2007-2008, but moved markets much less before and since.
  • Similarly, equity investors worried about upside surprises to inflation while the economy looked strong, but have paid relatively little attention to these data lately.
  • Reports on consumer spending and confidence were extremely important in the early recovery, but seem to have received a bit less attention over the last year or two (Exhibit 8).
  • Concerns about the global growth outlook and the still-weak labor market have kept markets very focused on news about the manufacturing sector and employment (Exhibit 9).

 

 

While the response of equities to economic data is generally straightforward—more growth and economic activity is good, more inflation is bad — there are some limited circumstances under which “good news is bad news” from a market perspective.

Towards the end of the business cycle, when inflation pressures and Fed tightening are a concern, markets may see especially strong activity data as a mixed blessing. This is evident in Exhibit 9, which shows that as of early 2007, the two-year trailing average response to employment data was negative (i.e. in 2005-2006, when the economy looked good, the equity market didn’t react well to stronger-than expected employment reports). But at most times, good news on employment or economic activity is also good news for the equity market.

Taking an average of the market’s responsiveness to all these economic indicators suggests that we are still very much living in a macro world. The equity market shows about twice as much sensitivity to macro data as it did in the years before the financial crisis (refer back to Exhibit 1). We suspect this will remain the case until the US and global economic outlook becomes considerably clearer.

 


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sat, 07/28/2012 - 18:00 | Link to Comment financial apoca...
financial apocalyptic contagion's picture

fuck this shit!

the economy is doing fine

don't you know the Olympics is on!

 

Sat, 07/28/2012 - 18:40 | Link to Comment Muppet of the U...
Muppet of the Universe's picture

throw out your tv.  Get some beer, bitches, cigars, vodka and oj, and a ghetto baster, and head down to a quiet stream/ river.  Fuckin just chill.  Olympics are wack breh.  steriods and commercials. 

Sun, 07/29/2012 - 04:21 | Link to Comment jeff montanye
jeff montanye's picture

possibly not the ghetto baster or blaster at the quiet stream?

i'm with you re: tv.

Sat, 07/28/2012 - 18:01 | Link to Comment q99x2
q99x2's picture

The Monad it cometh. The micro of micro data of which all there comes. The one that is all.

Look of course GS is going to say Macro data. That is the smoke in front of their mirrors.

When you have Libor rates which are the base of everything being fraudulently manipulated and you have fraud and conterfeiting at the micro level everything is fucked except for the banksters because it is those crimminals that determine the value of the fraud not the f'n market.

Sat, 07/28/2012 - 18:05 | Link to Comment resurger
resurger's picture

i just love GS! They are the best, the best shot callers ever

ZYNGA: recommendation Buy/Attractive

So now everyone focuses on Macro Data, the shillers and spinners are doing a great job!

Seriously Verbal QE (VQE) For The Mother Fucking Win!

 


 

Sat, 07/28/2012 - 18:33 | Link to Comment Muppet of the U...
Muppet of the Universe's picture

No for once I think Goldman has a Very good point.  For instance.  The vast majority of individual stock movements are stock company related.  For instance BDSI is a biotech company that recieved 180 million to be paid out at 30 million per month or quarter.  I bought at 2 bucks and its 5 dollars now.  Easy 250%.    But That stocks micro movements, were impacted by the macro market.  The macro market acts like a a soft, and sometimes very strong wind, that blows against the chart.  Downswings impact the upward growth of a trending market as much as upward swings, and they do play a role.  In fact I would argue the role the macro plays in the futures is exponentially important, and literally knowing where the macro market aka indices are going, will allow you to understand where everything else is going to go.

I believe the macro market is the key to understanding every single other market.  For once, Goldman isn't polishing a turd.

Sun, 07/29/2012 - 00:27 | Link to Comment Terminus C
Terminus C's picture

But... The entire market is manipulated byGS and JPM etc... So all they are trying to do here is explain why the market doesn't react in the same technical manner that it used to. This is smoke and mirrors to get human traders to believe that they can still prdict market movements and continue to bet their money at the casino.

You cannot predict a human manipulated market based on trends and charts, but they would like you to think that you can.

Fuck them AND the horses they rode in on.

Sat, 07/28/2012 - 19:02 | Link to Comment Beam Me Up Scotty
Beam Me Up Scotty's picture

Hurry up and buy it muppet before the price falls and we make less money!

Sat, 07/28/2012 - 18:11 | Link to Comment ATG
ATG's picture

Correlation point taken.

Macro Top Down may seem ro rule,

and missed +8% Bottom Up Micro caught so far this year.

Q2 2012 results on track for historical record with TYX yielding as low as 2.452% corresponding to a 40 PE.

Just saying...

Sat, 07/28/2012 - 18:13 | Link to Comment Sudden Debt
Sudden Debt's picture

We suspect this will remain the case until the US and global economic outlook becomes considerably clearer.

Clearer or better?

Sat, 07/28/2012 - 19:13 | Link to Comment disabledvet
disabledvet's picture

Clearer if you're stupid but getting the big bucks. Better if you're brilliant but flipping burgers at McDonalds.

Sat, 07/28/2012 - 18:47 | Link to Comment knukles
knukles's picture

Yes...
It's the same fucktard equity managers who never ever gave a shit about anything other than self aggrandizing navel gazing perpetually bullish horseshit stocks always go up pck the best company, no longer finding Any Alpha At All, now are going to try their Expert Hands at Out Performing their Bond Brethern who Understand How The World Works which is Why Bonds Lead Stocks etc., etc., etc.

Equity mangers are about as useful as a newly dropped warm turd in a freshly changed Depends when being awarded the Nobel Peace Prize by Paul Krugman broadcast exclusively, tape delayed on MSNBC

Fuck equity managers.
All of 'em.
Seriously.

They're the ones and same cocksuckers who've been until very recently supportive of the whole Ponzi between the Gubamnint Fed Treasury and Wall Street, the one and sames ridicule hard currency, are born again fucking Keynesians (just read a tidge of the CFA materials)
Useless hanger on over paid slugs who have never justified their status or pay, generally the same proselytizers of efficient markets who are cognitive dissonanced active stock managers

No I do not like them one bit.
How'd you ever guess that?.

They should be sent to Uzbek Indenture Proofreading Facility #6 for investment re-education

Sat, 07/28/2012 - 18:18 | Link to Comment Number 156
Number 156's picture

Could the Global economic outlook be any clearer?

With China poised for a hard landing lawn dart style, and the European outlook no better, I would expect even more pain. The USA is headed for depression, China is headed for revolt and the Euro is headed for the waste bin of history.

Sat, 07/28/2012 - 18:20 | Link to Comment I am Jobe
I am Jobe's picture

Buy moe ICRAP and Smart Phones. Future of Amerika Clicking and Texting and Sexting.

Sat, 07/28/2012 - 18:28 | Link to Comment slingshot
slingshot's picture

http://www.forbes.com/sites/chrisbarth/2011/09/26/new-study-old-news-stock-traders-are-psychopaths/

 

 University of St. Gallen study that shows stock market traders display similarities to certified psychopaths.

Not only do the traders match their counterparts, but, as Der Speigel succinctly puts it, the “stockbrokers’ behavior is more reckless and manipulative than that of psychopaths.”

Sat, 07/28/2012 - 18:40 | Link to Comment Reese Bobby
Reese Bobby's picture

Stock action means squat in the short-term.  But this post is worthwhile because U.S. equity markets are largely ignoring pretty bleak earnings and outlooks.  "Macro World" just means risk-on in anticipation of CB money printing; and there is a bad-news-is-good-news aspect to the stupidity.  The young turks and their HFT machines rule the day currently.  So what?  Before this cycle is over financial asset custody will be the most important factor for investors, and there really isn't any discussion on that topic, even on ZH.  Mark my words. 

Sat, 07/28/2012 - 19:20 | Link to Comment disabledvet
disabledvet's picture

The media has informed all of us that "the economy is slowing." who could possibly trade...and win...against such an obvious reality.

Sat, 07/28/2012 - 18:51 | Link to Comment doggis
doggis's picture

leave it to goldman to put out SHIT to distract.

the problem for equites is A MICRO PROBLEM versus macro. IT IS CALLED PRICE DISCOVERY!

BANKSTER control of fraud and regulatory capture has led their mob leader bernake to ZIRP. 

YOU MANIPULATE INTEREST RATES TO 0% AND YOU MANIPULATE THE BENCHMARK LIBOR AND YOU DESTROY DISCOVERY OF ALL PRICES.

THIS IS A MICRO PROBLEM. THIS IS THE REAL FOCUS OF THE MARKETS - AND FRONT RUNNING CENTRAL BANKS IS A MANIFESTATION OF A MICRO PROBLEM.

KISS MY DESTROYED PRICE DISCOVERY BLANKFEIN.....MACRO MY ASS! 

Sat, 07/28/2012 - 19:36 | Link to Comment disabledvet
disabledvet's picture

"I like you. You have big balls."

Sat, 07/28/2012 - 19:27 | Link to Comment sabra1
sabra1's picture

i'd rather have a macro dick, than a micro dick!

Do NOT follow this link or you will be banned from the site!