Systematic Risk in the Macrocosm

The stock market fares poorly as an economic indicator. The reverse relationship—the impact of macroeconomic events on stock returns—often proves no less ambiguous. Closer examination of discount-rate effects, however, reveals the circumstances under which bonds decouple from stocks in a reversal of their usual positive correlation. Bad news for the broader economy often lifts stock prices, but not invariably. Negative macroeconomic news, in addition to signaling potential monetary intervention to lower interest rates, also conveys bad times ahead for corporate cash-flow and broader uncertainty about economic conditions. The potential impact of macroeconomic information on asset prices is often so contested that bonds and stocks move more upon the release of scheduled macroeconomic news than they respond to the substantive content of those announcements. Ultimately, uncertainty over a potential investor’s ability to maintain the ratio of consumption to aggregate wealth, especially labor income drawn from vulnerable and irreplaceable human capital, elevates investment risk in ways that can be understood only in light of macroeconomic risk over the course of the individual life-cycle as well as the broader economy’s business cycle.