Abstract
The authors explore the reaction of US stock portfolio returns to macroeconomic announcements spanning the period from April 1998 to May 2017. Using daily returns of 25 portfolios formed on operating profitability and investment, the authors investigate the extent to which potential asymmetries permeate the stock portfolios following macroeconomic announcements. The three methodological approaches utilized in this study suggest that the ISM non-manufacturing index, employees on non-farm payrolls, retail sales, personal consumption expenditure and initial jobless claims have a significant impact on portfolio returns. Also, portfolios consisting of companies with higher operating profitability and investment level are found to be less responsive to announcements. As the particular area has received little currency over the years, this contribution is of great significance, because it provides insights into the reaction of returns in value-weighted portfolios to announcements on certain macro-indicators. At the same time, the study informs portfolio managers of the implications of macroeconomic news, which drive economic expectations and can reverberate through the expected returns in US stock portfolios.
Highlights
It has been widely argued that macroeconomic announcements influence the behavior of financial assets, while feedback effects from the markets to the economy have been documented in the literature
The three methodological approaches utilized in this study suggest that the ISM non-manufacturing index, employees on non-farm payrolls, retail sales, personal consumption expenditure and initial jobless claims have a significant impact on portfolio returns
Our results suggest that by constructing portfolios based on companies with higher operating profitability and investment levels, there is potential to minimize the volatility risk against announcements regarding the ISM non-manufacturing index, personal consumption expenditure, and initial jobless claims
Summary
It has been widely argued that macroeconomic announcements influence the behavior of financial assets, while feedback effects from the markets to the economy have been documented in the literature. Developments in the economic landscape have implications for investors in so far, as they directly affect stock prices especially when these deviate from market expectations (Medovikov, 2016). Studies in this area primarily focus on the effects of macroeconomic announcements on stock indices. We have opted to use portfolios constructed on the basis of operating profitability and investment, an area that remains relatively novel and under-researched The choice of this type of portfolios is driven by the investors’ preferences given the prominent role of profitability and investment as means of sustainable growth for US companies.
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