Macroeconomics

You don't need a degree in economics to be a good investor. But you do need to understand the handful of big-picture forces that consistently move markets. When you see stocks fall sharply on a CPI print, or bonds rally when GDP disappoints, it's not random — there's a logic. Here it is.

GDP — the scoreboard of an economy

Gross Domestic Product measures the total value of all goods and services produced in a country over a period, usually quarterly. It's the closest thing we have to a single number that summarises economic activity.

GDP growth is generally good for stocks — expanding economies mean more corporate revenue, more employment, more consumer spending. GDP contraction is generally bad. The technical definition of a recession is two consecutive quarters of negative GDP growth, though economists use broader criteria in practice.

What moves GDP: consumer spending (the largest component in most economies, roughly 65% in the UK), business investment, government spending, and net exports. Consumer confidence is therefore a leading indicator — if people are nervous, they spend less, GDP slows, companies earn less.

CPI and inflation — the number central banks care about most

The Consumer Price Index (CPI) measures average price changes for a basket of goods and services. A higher-than-expected CPI print is usually bad for both stocks and bonds: bad for bonds directly (inflation erodes fixed payments), bad for stocks because it signals the central bank may need to raise interest rates to cool the economy.

Markets don't react to the headline number alone — they react to whether the number surprised relative to expectations. If CPI was expected at 3.2% and comes in at 2.9%, markets often rally even though inflation is still elevated, because the trend is better than feared. Expectations management is everything in macro.

Interest rates — the most important variable in investing

The Bank of England's base rate is the price of short-term money in the UK economy. It flows through to mortgages, loans, savings accounts, and bond yields within days. When rates are low, borrowing is cheap, economies expand, and investors are pushed toward riskier assets (stocks) to get any return. When rates are high, safe assets (bonds, savings) offer real returns and there's less incentive to take risk.

The economic cycle — four phases

Economies move in cycles: expansion, peak, contraction, trough. Different assets and sectors perform differently across phases:

Phase	What's happening	Tends to outperform
Early expansion	Recovery from recession, rates low, confidence returning	Cyclicals, financials, small caps
Mid expansion	Growth solid, inflation creeping up, rates rising	Tech, industrials, broad equities
Late cycle	Growth slowing, inflation high, rates peaking	Energy, materials, value stocks
Recession	GDP falling, unemployment rising, rates being cut	Defensive stocks, bonds, cash

Leading vs lagging indicators

Leading indicators change before the economy does — they predict. The yield curve (covered in the Bonds section), PMI surveys, building permits, consumer confidence. Lagging indicators change after — they confirm. Unemployment, GDP, corporate profits.

Investors pay close attention to leading indicators because markets are forward-looking. By the time a recession is confirmed by two quarters of negative GDP, the stock market has usually already priced it in — and often started recovering.