Implied economic forecasts by Dan DiBartolomeo
Investors rely on a variety of methodologies in constructing their portfolios. Some investors would classify themselves as fundamentally oriented, while others use technical analysis. Relatively few would claim to select securities or construct portfolios on the basis of economic forecasts. Most market participants have the attitude that even top economists have little ability to forecast future macroeconomic developments with any consistency. Further, they are of the opinion their own ability to forecast economic events accurately is even less trustworthy. On the other hand, major brokerage firms and banks have at least one economist on staff and many institutions use economic forecasts in making asset allocation decisions (stocks vs. bonds vs. cash).
All agree, however, that macroeconomic effects influence returns on individual stocks. That oil prices affect oil and airline stocks comes as no surprise. That interest rates affect home construction is equally self-evident. Studies confirm that particular macroeconomic forces influence stock price movements and that some factors influence some stocks more than others. In that a stock or a portfolio of stocks is sensitive to a known economic factor, that sensitivity can be considered a risk. Even though we cannot predict movements in oil prices, we know that some stocks are positively influenced by oil price increases (oil stocks) while other stocks are negatively affected (airlines, utilities, plastics). By having a portfolio significantly sensitive to a macroeconomic factor, we are taking risks that may or may not be justifiable.