You can pick an excellent company and lose money for two years, simply because the macroeconomic backdrop has changed. Understanding that backdrop is not forecasting the economy: it is knowing which way the wind is blowing.
Interest rates: the gravity of markets
Warren Buffett compares rates to gravity: when they rise, everything gets heavier. Two mechanisms combine. First, bonds become attractive again, which draws capital away from equities. Second — and above all — companies' future flows are discounted at a higher rate, and are therefore worth less today.
Why growth suffers most from rate rises
A company whose profits lie far in the future (growth) sees its value collapse when the discount rate rises, because the most distant flows are the most heavily penalised. A mature company earning money today is far less sensitive. That is the whole mechanism of the 2022 shock.
Inflation
Inflation erodes the purchasing power of capital and of fixed income. Companies with strong pricing power (a solid moat) can pass it on to their customers and protect their margins. Those exposed to competition take the full force of it.
The economic cycle
Historically, cyclical sectors (industry, discretionary consumption, banks) outperform in expansion and recovery; defensive sectors (healthcare, consumer staples, utilities) hold up better in recession. These are tendencies, never certainties.
Do not turn it into a timing strategy
Economists themselves forecast recessions very poorly. Using macro to move in and out of the market is an excellent way to destroy performance. Use it to UNDERSTAND what is happening to your portfolio, not to try to front-run it.
In Earnnest
The dashboard's Macro context widget summarises the backdrop (rates, inflation, market sentiment) to inform your analyses, without claiming to predict it.
À retenir
- ✓Rates act like gravity: they weigh on every valuation.
- ✓Growth stocks are the most sensitive to rate rises (distant flows).
- ✓Understanding the cycle helps you interpret, not time — an exercise at which almost everyone fails.