macroeconomics

Macroeconomists look for ways to meet economic policy goals and create economic stability. In doing so, they often attempt to predict future levels of employment, inflation, and other key economic indicators. These predictions affect decisions made today by governments, individuals, and companies.

It is important to note the distinction between macroeconomics and microeconomics. Whereas Macroeconomics looks at the "big picture," microeconomics delves into the study of supply and demand and factors that impact individual consumer decisions. However, the two are inherently interrelated, as small decisions at the microeconomic level will ultimately have an impact on larger economic factors that influence the entire economy.

In the investing world, it behooves everyone to have at least a general familiarity with macroeconomic theory and the current state of the economy. It goes without saying that broad macroeconomic changes will inevitably be felt at both the corporate and the individual level. Furthermore, the markets themselves are often moved by the release of sensitive economic data, such as the latest GDP report or recent employment figures.

Often, those most concerned with macroeconomics tend to adopt a top-down approach to investing. Rather than strictly focusing on company fundamentals, top-down investors first attempt to analyze which sectors of the economy are poised to benefit from current economic trends. Only when they have determined the areas with the most favorable economic outlooks do they begin to search for the most promising companies within those particular industries. The underlying rationale behind this philosophy is that even strong companies can struggle if the industry in which they operate is facing a stiff economic headwind. Meanwhile, the weakest firms in a booming industry can still thrive.