For nearly seven years, financial markets have been more about policies than products, fixated on global liquidity over corporate cash flows -- with central bankers and finance ministers driving the action rather than CEOs and chief financial officers.
Wall Street has been in a state of macro myopia, and most investors are tired of it.
They’re weary of handicapping Greece bailout talks, tracking stealth currency depreciations and parsing every word uttered by Federal Reserve Chair Janet Yellen and her European counterpart, Mario Draghi. They dislike having to brush up on Japan’s “Abenomics,” for instance, or to sort out why the Fed might need to pay interest on excess bank reserves. The Fed's noncommittal statement Wednesday on the timing of its first rate hike since 2006 prolongs their frustration.
Most professional investors didn’t get into the investing game to place money at the mercy of macro forces and official policies. They prefer to evaluate industries and businesses and select the potential winners from losers.
Yet the dominance of monetary policy and policy eruptions such as the interminable Greek bailout talks obscure those skills and stokes a fruitless debate over how much of this bull market is “for real.”
The latest Bank of America Merrill Lynch global fund manager survey reveals the way hard-to-predict policy matters cloud the investment picture. The proportion of investors saying they’ve “taken out protection” against a sharp decline in stock prices over the next three months is the highest in seven years, thanks to the Fed and Greece overhangs.
On Greece, 43% expect a “positive Greek resolution,” 42% anticipate a default but no exit from the Eurozone, and 15% see a Greek exit – near perfect collective indecision on a crucial outcome.
Looking for a good investing story
Jason Trennert, chief investment strategist at Strategas Research Partners, says he detects signs of acute macro fatigue among his clients, most of whom are professional fundamental stock pickers who’d prefer to be rewarded for focusing on corporate investment “stories.”
Naturally, these company narratives are still there to be followed. But aside from a small handful of cult growth bellwethers such as Apple Inc. (AAPL), Netflix Inc. (NFLX), Tesla Motors Inc. (TSLA), Chipotle Mexican Grill Inc. (CMG) and biotech names, the main driver of market action has been the cost and quantity of money in the system and officials’ decisions on how to modulate it.
Different stocks, sectors and asset classes have moved in near lockstep over the past few years rather than behaving independently, according to their own idiosyncratic circumstances.
“Since the financial crisis, that hasn’t been the case,” says Nick Colas, chief market strategist at institutional brokerage ConvergEx. The high correlation among various market segments has made it tough for careful investors, and those who get paid to outperform an index.
“With correlations so high, how do you adequately diversify a portfolio of financial assets?” asked Colas. “Answer: you can’t.”
Is there a chance, at last, that investors and market professionals will soon get some relief for this “macro fatigue"?
There are tentative signs that this might be happening. The CBOE derivatives exchange tracks something called the “implied correlation” of stocks in the S&P 500, or the indicated degree to which most stocks are moving together, as in a herd. This gauge has been declining since October of last year and is well below peak readings set during the European debt and U.S. debt ceiling panic of 2011.
Colas notes that the average correlation of industry stock sectors has been nearly 84% since 2009, meaning the typical sector moves with the broad market 84% of the time. This measure in the latest month ebbed slightly to 77.7%.
This is perhaps one reason that active stock-fund managers have put up a better fight against the S&P 500 than they have in recent years, when passive index investors reaped the most from the market run to record highs.
Trennert notes that the market’s stars used to be accomplished stock pickers, such as Bill Miller of Legg Mason and Jeff Vinik and Peter Lynch of Fidelity Investments. Yet in recent years, fixed-income or “multi-asset” managers have stolen the spotlight.
Think of Jeff Gundlach of DoubleLine Funds, Mohamed El-Erian of Allianz and Ray Dalio of Bridgewater Associates – a hedge fund firm overseeing $150 billion built solely on “global macro” portfolios.
The way bonds, currencies, commodities and – to a lesser degree – equities would respond to ultra-low interest rates and rounds of central-bank asset purchases became the crucial determinant of investment performance.
Moving away from macro dominance
Arguably, with the Fed methodically setting the stage for an end to zero interest rate policy, we could have passed the point of “peak macro.”
Trennert notes, “Perpetually low interest rates have led companies to take financial risks [such as share buybacks and debt restructuring] rather than economic risks like capital spending.”
This process has likely just about run its course. Indeed, the case can be made that the ascendance of professional activist investors as a sort of transition from a macro-dominated market to one propelled by corporate decisions and individual company performance.
The new crowd-favorite activists such as Carl Icahn, Bill Ackman and Nelson Peltz are agitating for companies to mobilize inert capital and stop simply sitting on cash or letting borrowing capacity go unused. Right or wrong, they are fighting the confused, complacent idleness of many CEOs.
Of course, the decline of macro myopia might be just wishful thinking on the part of equity investors, who have been overshadowed by their counterparts in other asset classes. But there is a rough precedent for an all-consuming market theme fading after several exasperating years.
This macro fatigue, Trennert argues, is “similar to the policy fatigue that we experienced after the fiscal cliff. After TARP, health care, Dodd-Frank – people just got worn out.”
From 2009 through 2012, the market story was largely about tax policy, debt ceilings, fiscal maneuvers and financial regulation, starring Treasury Secretary Tim Geithner, President Obama, even House Speaker John Boehner.
“Now,” Trennert adds, “most of our clients couldn’t tell you the name of the Secretary of Treasury within 10 seconds. Policy, with the exception of monetary policy, is irrelevant.”
Is there a chance that before too long, investors might fail to recognize the name of the Greek finance minister – or even the Fed chair?