Mastering Macroeconomic Impact: A Guide to Optimizing Investment Returns

David Beckam

Macroeconomic events significantly impact the historic returns of different asset classes and can play a crucial role in an investor’s ability to make money in investing.

Understanding the impact of macroeconomic events on different asset classes is essential for an investor’s strategy to achieve desired investing returns. This article will cover various macroeconomic scenarios and how they impact different asset classes, including stocks, bonds, commodities, real estate, and cryptocurrencies.

By understanding the interplay between macroeconomic events and asset classes, investors can make informed decisions about their investment portfolios and optimize their returns.

Whether you are a seasoned investor or just starting, understanding the impact of macroeconomic events on different asset classes is a crucial aspect of building a successful investment strategy.

In addition to this, it is always good to invest in your knowledge. This is why I recommend you my book: “Live Off Dividends.”

What is Macroeconomy?

To understand the various macroeconomic events that can impact the types of asset classes, it is vital first to understand the importance of Macroeconomics and how it affects the broader economy.

Understanding the Macroeconomy

The Macroeconomy focuses on the overall economy’s health by understanding factors such as the Gross Domestic Product, Unemployment, Inflation, and Trade Balance.

In addition to the various aggregate economic factors that comprise the economy, macroeconomics also focuses on the economic policies by the government and the central bank that impact the economy, including fiscal policy (government spending and taxation) and monetary policy (interest rate increase/decrease).

US interest rates as of February 2023

Below we list the macroeconomic events that impact growth and how to poise your assets through various strategies for growth to take advantage of the events.

Maximizing Returns for Asset Classes

Interest Rate Cycles

The most significant change in the Macroeconomy comes from the change in interest rates from the central banks, which can impact the investment returns and the potential investor strategy in asset allocation in various classes.

For instance, when the Central Bank, in this case, the Federal Reserve of the United States, raises the benchmark rates, it can send ripple effects in financial markets, impacting different asset classes in various ways.

Generally, interest rate hikes are bad news for investors looking to invest money through various investments such as stocks, bonds, and other instruments, including real estate.

However, some areas of the economy generally excel during the period.

Impact of Interest Rates on Bonds

For US Bond investors, interest rate hikes signal that bonds with higher yields (interest rates) are more attractive than the prevailing bonds with lower yields.

That means that the price of bonds with lower interest rates falls (making their yields rise) since they are less desirable to investors.

Interest rate hikes essentially leave most existing bondholders feeling in a pinch. In 2022, for instance, bonds declined in aggregate by 15%, as per Forbes, due to the steep increase in the interest rate curve.

Impact of Interest Rates on Risk Assets

On the other end of the spectrum, risk asset holders like the stock market and cryptocurrency investors feel the severe impact of the Federal Reserve’s actions.

As per Bloomberg, investment returns across these risk assets fell heavily in 2022, with returns down between 20% and 70% due to the higher cost of borrowing and cost of capital.

Interest Rates and Housing Markets

The housing and real estate market is perhaps the most severely impacted asset class based on the change in interest rates.

Higher economic interest rates make it more expensive and challenging for individuals/businesses to borrow money for real estate purchases.

Investing in REITs can especially be challenging, given the leverage used by the vehicles. For example, housing prices crashed by 40% in 2008 and are projected to decline in 2023 because of higher mortgage and financing rates.

Assets That Benefit From Rising Rates

The two asset classes that benefit from interest rate hikes are commodities and currencies.

Commodities are tangible assets priced in US dollars, and an increase in interest rates means that commodities see a spike in price.

Similarly, the US dollar also benefits from an increase in interest rates since more investors pile into US treasury bills and bonds on account of higher yields.

High Inflation

If one thing is clear, inflation and its associated risk disrupted investor strategy in 2022.

Inflation, which measures price growth across various goods and services, can make or break household spending. At one point, US inflation hit a 40-year high of 9.1%, as per CNBC, making products and services unaffordable for many Americans.

As time went on, this took a toll on various asset classes, as the government and companies came under pressure to act quickly.

Let’s look at each asset class to understand the specific impact of inflation and which asset class has the highest returns.

Risk assets, like stocks and cryptocurrencies, tend to outperform the rest of the market during periods of high inflation. This is because companies have the pricing power to increase prices to meet raw material and wage inflation. At the same time, cryptocurrencies and other risk assets are bid up due to excess liquidity in the economy.

Tangible assets like commodities and housing also tend to surge since too much money is chasing too little supply. For example, the price of copper and steel surged by over 50% between 2020-22, as per Bloomberg, while median housing prices have also surged by 50%.

Copper Price. Source: TradingView

On the other hand, assets like Bonds and US dollars declined due to lower yields, which prompted investors to shift to risky assets.

Economic Data Improvement/Deterioration

It is first important to understand the fundamental macroeconomic factors that drive the economy to develop a strategy for investing in various asset classes. This primarily boils down to two components of economic data, namely GDP Growth, and employment.

Historically two consecutive quarters of negative GDP growth have signified a ‘recession.’ In contrast, periods of higher unemployment (over the median level of between 4-5%) have meant an economic slowdown, which impacts asset prices adversely.

Higher growth and lower unemployment have meant strong economic fundamentals, leading to increased asset returns.

Intense economic activity, including future expected growth and a robust labor market, can lead to gains across the board with stocks, bonds, cryptocurrencies, housing, commodities, and currency.

Assets that produce cash flows (stocks, bonds) get a boost from an improved fundamental outlook. In contrast, tangible assets (housing, commodities, currency) benefit from a subsequent rise in demand in the overall economy.

On the contrary economic data, which shows a deterioration/contraction in growth and the health of the labor markets, can drive the decline in assets, just as positive data can drive asset prices up.

Trade and Policy Change

If the historical returns of asset classes are anything to go by, it is clear that markets face volatility every few years due to the change in policies from the government.

Elections in the US occur every four years, and to understand how it impacts investing returns, it is essential to first look at the policies of each of the two parties in power and how it affects returns.

Republicans-led policies have generally been good for risk assets, including stocks and cryptocurrencies, since their priorities focus on reducing regulation and taxes and improving the overall economic environment.

This is evident between 2016-2020, when the republican led government cut corporate taxes, as per Vox, scrapped thousands of legislations, and pushed favorable regulations for corporations.

All of this sparked one of the best rallies in risk assets over the last two decades.

While Republican policies are generally good for the macroeconomic trend, there are a few areas where their policies can adversely impact returns.

Republicans have historically been focused on being fiscally conservative, which can be a net negative for bonds and other fixed-income instruments. Still, there are other side effects, like the Trade war between the US-China which began in 2018, as per BBC, impacting stocks of specific industries like Auto and Semiconductors.

How the US-China trade war has escalated. Source: BBC

On the other end of the aisle, Democrat-led policies have recently prioritized social and environmental issues, particularly beneficial for companies across clean energy, infrastructure, and healthcare, as per CNBC.

Their policies have also focused on prioritizing government spending, which is fixed-income for fixed-income securities and commodities, while being a negative for the US dollar.

Geopolitical Uncertainty

The fifth and arguably most uncertain factor to impact the macroeconomic trend is geopolitical uncertainty.

Two events paint a clear picture of this in recent times. First is the current war between Russia and Ukraine. The second is the uncertainty between China and Taiwan which has global superpowers on edge.

Uncertain geopolitical events like Ukraine or Taiwan can have various effects across various asset classes. For instance, certain commodities like wheat and oil saw a short Russia entered after Russia entered Ukraine, as per the World Bank.

Commodity price changes in 2022. Source:

Similar concerns persist if China were to invade Taiwan, which could lead to a spike in the price of semiconductors.

Companies competing in the specific sector affected in these vulnerable regions (in this case, Ukraine/Taiwan) will benefit. For instance, after Russia’s entry into Ukraine, oil and gas stocks outperformed the rest of the market, as per Bloomberg, due to the energy shortage leading to a price spike.

Other areas of the economy are also impacted, although the effects are more predictable than the swings in wild stocks/commodities.

When there is geopolitical uncertainty, investors generally flock to bonds and gold as safe-haven investments, driving up the price of these instruments (and lowering interest rates for bonds). However, the US dollar also strengthens against other currencies and, going long, the US currency can prove to be a good trade strategy for investors during the uncertain period.

Macroeconomic Events – Conclusion

The interplay between macroeconomic events and different asset classes is essential to investing and can significantly impact historical returns.

Investors can make informed decisions about their portfolios and optimize their returns by understanding the impact of events such as interest rate changes, inflation, political elections, and geopolitical events.

A sound investment strategy considers the impact of macroeconomic events on different asset classes and adjusts accordingly. By doing so, investors can improve their chances of achieving their desired investing returns and successfully make money in investing.

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