The Game of Investing, Vol. 17
We’re looking at the macro data that matters most for investors to successfully navigate any global economic trend.
In this issue, former hedge fund trader turned markets educator, Jamie McDonald, walks us through the macro data minefield.
- “Some of the biggest market events are around the release of economic data,” says Jamie. “And if time is our most valuable commodity, you need to know which macro data matters so you don’t waste yours.”
In this issue, we’ll cover 3 things:
- The basics of macro — and why it matters to markets
- The differences between surveys and hard data
- The macro data that you need to know
Welcome to the Game
Welcome to The Game of Investing, a bi-weekly newsletter bringing you “aha” moments and actionable lessons from Real Vision experts. No matter your level of expertise, markets are tough — which is why we all have to put in the work. Ultimately, the game of investing is a competition with yourself. Our mission is to help you navigate the path to success. Prepare to level up.
Let’s get started.
LEVEL 1 — The Basics
When it comes to economic surveys and reports, there are typically 3 outcomes:
- a data point can beat economists’ expectations,
- miss expectations,
- or meet expectations.
These results are what drive markets, but the market’s reaction can often provide more insight than the data itself.
- “Many investors get in hot water by not understanding why a beat leads to a selloff,” says Jamie. “It isn’t the absolute value of the data point that matters, but the market’s expectation.”
In order to land on the right side of a data-driven move, investors must develop a keen sense of what the market has already “priced in.”
LEVEL 2 — Leading vs. Lagging Indicators
A big part of understanding what’s priced in is differentiating between leading and lagging economic indicators.
- Leading indicators — aka “soft data.” These are surveys like the ISM Purchasing Managers’ Index (PMI) or U.S. retail sales that offer insights into sentiment shifts and predict future trends.
- Lagging indicators — aka “hard data.” These are reports like gross domestic product (GDP) and the consumer price index (CPI) that provide factual information on past economic performance.
You might think that leading indicators are most important as they’re more likely to predict the future — but savvy investors know to keep an eye on both.
Understanding the delicate balance between predictive sentiment shifts and market reactions to hard data will add a priceless tool to your investing toolbox.
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Level 3 — Meet Your Macro Leaders
On the soft data front, the ISM Purchasing Managers’ Index (PMI) manufacturing and services reports are considered the 2 most reliable leading indicators available.
- PMI gauges sentiment among senior executives regarding business activity.
- It’s measured on a scale of 0 to 100, with anything below 50 indicating economic contraction.
In last week’s issue, Real Vision co-founder and CEO Raoul Pal schooled us on how he uses the ISM PMI to help predict cyclical tops and bottoms in assets.
Other important soft data points to watch are retail sales, consumer sentiment surveys, weekly jobless claims, and the yield curve.
As for hard data, there are some stalwarts:
- CPI is vital for tracking and predicting inflation — with inflationary changes impacting market composition and expectations.
- Gross Domestic Product (GDP) helps predict trends based on factors like taxes, spending, and currency strength.
- And the unemployment rate is a critical labor market indicator. Spikes in unemployment often mark a recession (and a potential entry point for risk assets).
A large delta in hard data versus expectations can surprise markets, leading to the type of volatility that day-traders love. But when the market has properly priced in hard data, the response will be a resounding, “meh.”
🔑 Monitoring the macro data will help you determine which are most meaningful in the moment — and help you develop a macro framework catered to your style of investing.
Thanks for reading. In our next issue, we’ll discuss how you can form your own macro strategy in these constantly evolving markets.
See you then.
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