Beyond macro: These are our current key indicators

Bloomberg TV, CNBC, BBC and so on - news channels explain the daily ups and downs of the stock market depending on the latest macroeconomic signals, such as inflation data or purchasing managers' indices. But how important are they currently for future stock market developments? And what are we looking at?

Phil Gschwend

Forecasts of stock returns require several indicators (Picture:

Macroeconomic signals are often used as the main indicators for investment decisions. However, they are only one part of a holistic analysis. They are often sluggish and sometimes offer investors no added value for tactical decisions. We are currently using more dynamic indicators. They provide us with valuable information for positioning in the current environment.

  • Financial conditions: This signal evaluates the financial conditions in the economy. It was developed to assess factors such as the availability and cost of credit and the general liquidity in an economic system. Loose financial conditions are good for the financial market in the short to medium term, while tighter financial conditions slow down momentum.
  • Sentiment / Positioning: The stock market is significantly influenced by emotions. One sentiment signal, for example, is the AAII Sentiment Survey. This is a sentiment survey of the members of the American Association of Individual Investors (AAII). The survey measures how optimistic or pessimistic private investors are with regard to stock market developments over the next six months. Such signals serve as a contra-indicator: pessimistic sentiment indicators can indicate that the market is oversold. We use positioning data to recognise how investors are specifically positioned and can thus identify outliers.
  • Technical signals: Technical signals help to determine entry and exit points and enable better risk management. Signals such as momentum or trend channels can be particularly helpful in phases when fundamental data is less effective and emotions play a greater role. For some months now, various stock markets have been in a perfect trend channel and are showing strong momentum.

Economic indicators as signposts

The aim of theoretical models is to estimate the expected returns of an equity portfolio or a share. In this context, the Grinold-Kroner formula from the 1980s is a well-known example that uses macroeconomic figures for estimation.

What is the Grinold-Kroner formula?

The Grinold-Kroner formula is a theoretical tool used in financial analysis to make investment decisions. It is an equation that aims to generate a theoretical understanding of how and why equities might generate returns. It breaks down the expected stock return into several components (as shown above). Despite its advantages, however, it should be borne in mind that the formula is highly simplified and takes little account of market dynamics.

In principle, the economy and the stock market should move in the same direction, as the model above shows. However, we need signals to help us make tactical decisions, as macro figures tend to be backward-looking, while market participants look forward.

How helpful are economic indicators for tactical investment decisions?

At the time of publication, investors adjust their positions, which results in market movements. A positive surprise should therefore be a good signal for the market and vice versa . In intraday trading, various studies such as those by Li Li and Zuliu F. Hu (IMF) have found a positive correlation. However, if one observes the market development over several weeks and months over a period of 20 years, this correlation loses its strength. The following chart shows a very small positive correlation between the surprises (x-axis: Citi Eco Surprises) and the subsequent 3-month share returns.

Source: Zürcher Kantonalbank, Bloomberg

Economic data irrelevant? It depends on the time period

Economic data has some weight when forecasting share returns. However, it fluctuates over time. Currently, for example, the correlation between equities and the ISM Manufacturing, a purchasing managers' index for the manufacturing sector, is low. In the years following the financial crisis, for example, the correlation increased. This was also a phase in which macro hedge funds were able to outperform other hedge funds (light blue line) or even the S&P 500. Most of the time, however, the correlation is low or non-existent.

(Source: Zürcher Kantonalbank, Bloomberg).

Three reasons why this is currently not working:

  • Concentration: The higher the proportion of non-cyclical stocks, the less relevant macro indicators are. The equity market currently consists of around 60% non-cyclical stocks, which are less directly driven by economic indicators.
Index weight in %, EN = Energy, MA = Materials, FI = Financials, IN = Industrials, CD = Consumer Discretionary, RE = Real Estate, IT = Information Technology, HC = Health Care, ST = Staples, UT = Utilities, CO = Communication (Source: Zürcher Kantonalbank, Bloomberg).
  • Dominance of central banks: Central banks around the world have intervened heavily in the market in recent years. For example, massive amounts of liquidity were pumped into the system during the Covid months. As a result, risk-on assets quickly climbed back to record highs despite the gloomy economic outlook at times. 
  • Speculating instead of investing: The average holding period for a share has fallen from five years in the 1970s to ten months. Emotion-driven buying and selling to make big money has come to the fore. In addition, algo trades, which are based on technical trends rather than real factors, are on the rise.


Both economic indicators and dynamic indicators play a role in forecasting share returns. Which type of indicator is better at which point in time depends on various factors. These include market conditions, the investment horizon and the intervention of central banks. In practice, it is important to find the right balance between economic indicators and dynamic indicators, taking into account the factors mentioned above - the right mix is therefore crucial to investment success.


Investment Strategy