How Do Macro-Financial Factors Influence Asset Classes’ Performance? An Empirical Analysis

Asset class returns are strongly influenced by macro-financial factors such as economic growth, inflation, and market volatility. This study empirically examines these relationships by analyzing monthly data from January 1979 to August 2024 across four major asset classes and six composite indicators derived from fifteen macro-financial variables. We calculate the average excess return of each asset class first by conditioning solely on the direction of macro-factor changes, and subsequently by considering both the direction and initial levels of these factors. Two main findings emerge. First, variations in the six macro-financial factors are statistically significant drivers of the excess returns across the four major asset classes analyzed. Second, these relationships are state-dependent, as they vary with the initial conditions of the factors. These results have relevant implications for macrobased tactical asset allocation, as they demonstrate that relying solely on changes in macro-financial factors without accounting for the levels from which these changes originate may lead to misleading conclusions. For example, both equities and high yield bonds tend to underperform their unconditional historical average annualized return when inflation increases from high levels, while they generate positive excess returns when inflation rises from low levels, which do not necessitate anti-inflationary measures from central banks. Our findings underscore the importance of incorporating initial macro-financial conditions to bolster the effectiveness of macro-based tactical asset allocation strategies.