Key insights
- A value investor is questioning whether to incorporate macro indicators into their investment strategy to manage risk and adjust capital deployment. They track yield curve spreads, ISM Manufacturing PMI, initial claims, and high yield credit spreads. Deterioration in these indicators leads to increased cash holdings. The question is whether this approach is beneficial or overthinking the process, as even strong value stocks can decline significantly during recessions.
I've always been purely bottom up but lately I'm wondering if I should be watching a few stock market indicators for macro risk. Not to time individual trades but just to adjust how aggressively I deploy capital. Even great value stocks can get cut in half during recessions. Buying at 10x earnings sounds great until earnings fall 40% and you realize you were actually at 12x forward.
The indicators I've been tracking: yield curve spread, ISM Manufacturing PMI, initial claims trend, high yield credit spreads. When all four are normal I stay fully invested. When 2+ deteriorate I hold 15 to 20% cash even if I see individual opportunities. I've also been supplementing with marketmodel which aggregates macro inputs into a daily signal. Saves me from becoming a part time macro analyst.
Am I overthinking this or do other value investors incorporate macro at all?