A 5-step guide to processing ambiguous news in the markets and the economy 📋

Plus a charted review of the macro crosscurrents 🔀

An AI-generated image of newspapers.

Stocks rallied last week, with the S&P 500 surging 5.9% to close at 4,358.34. It was the strongest one-week gain since November 2022. The index is now up 13.5% year to date, up 21.8% from its October 12, 2022 closing low of 3,577.03, and down 9.1% from its January 3, 2022 record closing high of 4,796.56.

One of the most talked about TKer newsletters has been July 2’s: 11 ways cynics argue any news is bad news 👎. In a nutshell, that dispatch addresses how changes in many metrics can be interpreted as a negative development regardless of the direction of the change. For example, a rising saving rate is arguably bad because it reflects an increasingly cautious consumer that is pulling back from spending. But a falling saving rate is also arguably bad because it reflects an increasingly irresponsible consumer who is spending beyond their means.

The truth is that all of these interpretations carry some theoretical weight.

So the question becomes: How does one decide between the positive interpretation versus the negative interpretation?

It’s no secret that TKer has been embracing the more positive view with most metrics. To be clear, this isn’t about being optimistic for the sake of being optimistic. There is a process.

Step 1: Have a robust macro framework 🖼️

When I was on Bloomberg’s “Lots More” podcast two weeks ago, co-host Tracy Alloway asked how I balance the signal coming from individual companies against macro trends.

I explained that for TKer, the first step is to have a robust macro framework.

Every Sunday, I provide subscribers with a review of macro crosscurrents, in which I compile a variety of macro metrics from the previous week. That’s followed by a section where I put it all together, synthesizing the macro narrative in TKer’s view — which by the way hasn’t changed much week to week or month to month in the last year or so.

For a long time, the macro story has been one defined by excess demand, confirmed by elevated job openings, record-high business investment order activity, and unusually strong consumer and business balance sheets. These economic tailwinds have been reflected in related trends like persistent job creation, resilient corporate earnings, and ever-increasing spending.

For more, read: 9 reasons to be optimistic about the economy and markets 💪

Step 2: Determine if the news is a macro story or an idiosyncratic story ⚖️

If an economic metric, a company’s earnings announcement, or some other news is in line with your macro framework, then congratulations: You just got confirmation that your macro narrative makes sense.

At the same time, it is often the case that individual companies — or even a group of companies — may say something that conflicts with prevailing narrative. A great example of this is when the big tech companies were announcing mass layoffs during the latter part of 2022.

For months, news of these high profile layoff announcements made for alarming frontpage headlines. But in those same months, net job creation in the economy persisted, aggregate measures on layoff activity remained low, and most other broad measures of activity held up. The big tech layoffs didn’t signal bigger problems for the economy. Rather, they reflected issues that were largely isolated to a sector that reflected less than 5% of employment.

Another example is the ambiguous signal from Walmart’s sales. As the country’s largest retailer, you might assume strong sales reflect a strong consumer. But sometimes, industry analysts and even Walmart management will say some of the incremental sales growth is coming from budget-constrained consumers trading down from pricier retailers — a sign that the economy may be in decline.

Despite months of stories about how consumers have been “trading down” (see here, here, and here), broad economic metrics have consistently confirmed the consumer has actually been healthy. In other words, while there may be some truth to this trading down behavior, it appears to be an anecdote that unfortunately doesn’t reflect the great macro narrative.