Steve Thaxter- Senior Partner and Principal Adviser

Sovereign Wealth Partners

What drives stock markets the most?  The macro (economic news) or the micro (stock specific news)?  According to Goldman Sachs, since COVID hit us in 2020, macro news like GDP growth, interest rates and inflation have been the main driver of stock returns in the US.  But from earlier this year there’s been a big turnaround and finally we’re back to company specific news dominating the show, with 71% of market returns explained by stock announcements, rather than 41% a year ago.  

Why is this? Perhaps the biggest change is that rates on 10 year bonds in most countries around the world are now steadier and moving in smaller trading ranges.  Theoretically many investment assets are valued from this benchmark, so it helps everyone if the backdrop stays steady. 

Why is this important? It’s simply that in this environment, it’s more important to be holding the right stocks than trying to out-think the economists and central bankers.  Analysts’ earnings revisions at the company level become more important – the strong will get stronger, the weak will get weaker and that will be more clearly seen in share price action.   

In theory this is a better environment for active management to shine, for example concentrated strategies and long-short funds.  Passive “index style” managers will dispute this of course!  We’ll just have to see! 

Source: Goldman Sachs via Firetrail 

It’s also interesting to see that since the GFC of 2008 it’s been macro factors driving most of the return, most of the time.  No coincidence then, that according to SPIVA, since 2009 most of the active managers in the US have been underperforming the S&P 500 index after costs. 

Chart: Percentage of Large-Cap Domestic Equity Funds Underperforming the S&P 500 each year.

Source: S&P Dow Jones Indices