Macro - how does this affect the individual stocks?

How does Macro affect the stock market and companies? 

Macroeconomic

<Federal Reserve GOV> 
Macroeconomics is the study of whole economies--the part of economics concerned with large-scale or general economic factors and how they interact in economies.

<Investopedia>
A macroeconomic factor is an influential fiscal, natural, or geopolitical event that broadly affects a regional or national economy.

The relationships between various macroeconomic factors are extensively studied in the field of macroeconomics.  Examples of macroeconomic factors include economic outputs, unemployment rates, and inflation.   

Macroeconomics look at the elements of inflation, unemployment and economic growth - driven by monetary/fiscal policies and structured in different market models (essentially capitalist versus non-capitalist).  Some of these (inflation, unemployment & economic growth) are causes, some of these effects and some are both.

Factors affecting the macro

We have several factors leading to more "inflation, unemployment & negative economic growth":

• increasing household debts, 
• unaffordable housing/rent, 
• food challenges, 
• rising energy & fuel costs, 
• infrastructural weaknesses (like ports, bridges, roads, etc) 
• worsen by the pandemic, extreme weather, supply chain challenges and geopolitical tensions in various countries like Ukraine, Taiwan, Israel and more. 

What is a recession? from investopedia

What is recovery? By investopedia

To have confidence that the economy will emerge better - we need to look at reducing inflation, reducing unemployment and positive economic growth amidst the various challenges.  These same signs that warn us about a downturn will also be indicators of market recovery.  

How can recession (macro) affect a company with a strong moat?

What one company does is limited. With a strong financial position, it is difficult for example Tesla to go under.  But they may run into issues when their supplies, raw materials, battery, and chips have issues with supply chains threatened and suppliers go under.  Should China performs a naval blockade around Taiwan, it is cutting off supplies of chips internationally.  Tesla with its processes should be more resilient than the rest.  However, it is prudent to expect some direct/indirect impact when the situation develops - eg Giga Shanghai lockdown during Covid19.  What happens to Telsa if the US and China enter into a conflict?

The main tool of the Federal Reserve - interest rates
However, the Fed's main tool of interest rate adjustment will only address part of the causes. To counter inflation, the Fed increases interest rates to encourage savings and discourage spending.  The US is predominantly driven by consumption, instead of savings.  Inflation is the invisible tax that reduces disposable income as living expenses rise.  This increase in interest rates usually leads to a reduction in spending, as more will be spent to serve loans and mortgages and spending on essentials like housing, utilities, food, medical and transport. The reduction in spending usually leads to slower economic growth or even decline.

In simplicity, price is the result of demand and supply.  However, the Fed is trying to bring down inflation with the main tool that they have - interest rates.  This is affecting the demand side but the government will need to fix issues in the supply (& supply chain + infrastructure).  

Challenges of the supply chain:

• shortage of 80,000 drivers in USA alone, 
• rail workers plan for a strike that will cost the US approximately USD$2 billion a day 
• Infrastructure like ports, roads, and bridges need to be restored - not just to the former but upgraded to take on better payload, more resilient to weather and with materials emitting less carbon footprint (which generally cost about 25+% more).  
• The US oil refinery capacity shortage will take years to fix and building a new refinery will cost billions and years to build.  There are no new plans in sight to build another to mitigate the shortfall in refinery capacity.
• Now, the US continues to donate millions to Ukraine in a proxy war.  War demands a price and this cannot be a financial black hole as the war drags on.  

Ukraine - the victim of a proxy war

Unfortunately, Ukraine is likely to be left holding a broken nation, with a wrecked economy, broken infrastructure, lives lost and livelihood ruined.  Yes, they can hold their heads high with pride should they win.  A devasted economy will need to be rebuilt with the remnants - over decades to restore Ukraine back to her glory, battling through (hyper) inflation, and the new battlefront of finance, food & fuel (energy). On a technicality, NATO has yet to accept Ukraine and on a technicality, Ukraine was left to fend for herself with bullets, war machines borrowed (at no or low costs) from the NATO-led west.  Russia is not without fault but now, Ukraine is punished for believing a narrative without the necessary backing from those who recommend them.  Given the risk of a recession hitting Europe and the US, how badly can Ukraine lose when the support dries up?

Crisis in real estate

Using real estate as an example.  Now, we face issues of homeowners walking out of the new home deals as the interest rate has surged beyond to what they can comfortably afford.  The builders are left with building materials, and staff without work and hassle to recover the money.  Will these be put to sales to new homeowners who are deterred by the record mortgage rates?  Who is going to pay the trucks who brought in the building supplies, the supplier of building materials and the local authorities who laid out utility networks of sewage, water and electricity, roads and more?  How about the financial institutions that have issued loans?  Who else will fall into the pit when business met with default?

No sector stands on its own.

In conclusion, when one sector is affected, related sectors will also be affected subsequently.  No man is an island, no business is an island.  However, different businesses have different moat.  Thus, some are able to recover faster from downturns.  These are the businesses that we can look into.  When the macro has stopped its decline, it will be wise to load up the shares, hold and watch time compound the value.  Let us spend within our means, invest with what we can afford to lose and do not leverage.  Let us invest in great companies at good discounts.