As inflation fears shift to recession worries, it becomes all the more apparent that holding a portfolio designed to weather macro volatility is paramount. Investment themes that work in one period often don’t perform up to snuff during a new market cycle. For example, coming out of the pandemic, central bank-induced zero-interest-rate policy helped set the stage for high-growth stocks, those with long equity durations, to outperform free-cash-flow-generating businesses.

That narrative gradually began to change as the economy reopened—we’ve seen value stocks make a relative comeback. Commodities, meanwhile, crept higher even before Russia invaded Ukraine. As inflation became front and center right under the noses of the U.S. Federal Reserve by late 2021, bonds began to finally sell off with vigor as the prices of oil, natural gas, and many agricultural soft commodities rallied. 

What was fascinating, though, was that the U.S Dollar Index continued to gain steam—mainly driven by the Fed’s 180 on its view of inflation. Chair Powell and the rest of the Federal Open Market Committee (FOMC), along with many Emerging Market central banks, were on the frontlines of hiking interest rates. That policy sent the greenback to its highest levels in some 20-plus years which had cascading impacts across the asset-class spectrum.

Federal Reserve Aggressively Hiking Interest Rates

The upshot: How stocks, bonds, commodities, and currencies intertwine is important to understand. Building and managing a macro portfolio that can play defense at times while also taking advantage from the long side during certain market conditions is crucial during uncertain times. Simply sitting back and holding a portfolio of basic stock and bond market index funds may not cut it in the years ahead – that strategy definitely has not worked well since inflation began to soar and interest rates jumped off the zero-percent floor. 

But what does it mean to hold a macro portfolio? At Allio, we believe in diversifying across asset classes so economic volatility won’t result in a severe shock to your investments. Our veteran portfolio managers monitor trends across the global economy to help keep your money strategically aligned with your goals and where the investment landscape is headed.

We use full-scale optimization to mitigate risks from the inflationary conditions of our time. We can even access assets and securities that could benefit from such volatility. It’s all done through the use of both traditional and alternative investment including real estate, emerging markets,  and gold. 

Thus, a macro strategy positions a portfolio so that its holdings can take advantage of large-scale economic theses by taking a ‘big picture’ view. Our expert strategists dissect issues like interest rates, inflation, unemployment, GDP, and industry trends to optimize portfolios.

One current trend investors must keep a close eye on is how U.S. stocks are performing relative to foreign shares. For most of the past 15 years, international equities have suffered in their relative returns to their domestic peers. Driving that performance gap has been a generally strengthening dollar as well as massive outperformance from stock market sectors like Information Technology and Consumer Discretionary. Value spots such as Financials and Energy have underperformed. That has been a goldilocks situation for the S&P 500 versus, say, the Nikkei 225 index or the German Dax. 

Lately, however, the ground has been shifting under investors’ feet. We’ve seen a swift snapback in non-U.S. stocks, and we’ve pointed out that their recent stretch of alpha might continue. It is yet another example of how taking a global macro approach to portfolio management can pay dividends when such broad market trends reverse course.

Other key trends we are monitoring in 2023 include what happens with the U.S. Dollar Index as well as shifts in so-called ‘real’ interest rates, or rates after inflation is considered. With the greenback’s peak in September of last year, there has been a general tailwind for risk assets, like stocks. Moreover, real interest rates have been on the retreat which is yet another boon for equities and much of the fixed-income market. Volatility could be in store over the coming months should the broader trend of a strong dollar return along with a resumption of the move higher in real rates that began in earnest many quarters ago. Being able to spot trend inflections between these two risk barometers is a pivotal part of managing a global macro portfolio during these rocky times.

What else are our portfolio managers eyeing during this period of above-trend volatility and policy-driven price action? Credit spreads. It’s often said that the bond market is smarter than the stock market. What that means is that bond traders sometimes take a bigger-picture view of broad economic conditions while equity traders are sometimes enamored with a small group of story stocks. Fixed-income markets have indeed steadied themselves while the rate differential between high-yield (HY) junk bonds and comparable-term Treasuries remains historically tight. The same goes for the spread between high-quality investment grade (IG) credit and Treasuries. It is an arrow in the bulls’ quiver for now, but we are carefully monitoring changes in momentum and trend with both HY and IG corporate credit spreads.

You might be picking up on an underlying theme with how we manage money. Intermarket analysis, or the study of how asset classes and sub-asset arenas interact, can deliver alpha when used the right way. Since risk assets rarely appreciate in a straight line, we must be able to adjust when certain signals suggest macro-sensitive price action may change. Studying how sectors move with one another and how styles, such as growth and value, send warning signs of when to turn defensive and when to put the pedal to the metal on aggressive and cyclical parts of the market. A robust global macro portfolio built to protect capital must be able to detect how secular market regimes evolve.

The Bottom Line

Money managers who’ve been around a long time in this business know that “risk happens fast” but also that bear markets often endure years, not weeks. The ‘buy the dip’ mindset of the quantitative easing (QE) era could be a relic of the past. Markets continue to be volatile, both in stocks and bonds, while a general rally off the lows a few months ago has offered some hope for the perma-bulls.