MarketReader continually monitors every asset in the market and identifies the reason behind each unusual price movement. As a result, MarketReader users are able to understand price action in general, including how macro events are important to various securities, and how an upcoming event might impact their portfolio.
With the September FOMC meeting scheduled to end Wednesday, we wanted to share unique insights into how different macro events impact different market sectors. All of the data referenced below is based on data from the most recent 2-year period (but the MarketReader system continuously updates to always have live estimates).
FOMC Meetings (Interest Rate Decisions)
In terms of market-moving macro events, the FOMC meeting, which happens eight times a year, is the macro event with the biggest impact.
But the impact does vary by sector (see red line below)
As the chart below shows, the most sensitive sector is Information Technology, which has 4x (quadruple) normal volatility (shown in terms of ratio of standard deviations vs normal) around FOMC releases.
The energy sector is also sensitive to FOMC, but volatility is “only” double normal.
Regardless, every sector is most highly impacted by FOMC meetings aside from Energy, which is most sensitive to CPI and Fed press conferences:
Looking at each sector’s sensitivities to retail sales (dark blue line), you can see that in general the sensitivities are substantially lower. Financials do move more than normal, but only slightly.
Given that our system measures market response based on the individual asset type, it is rational that Information Technology, Consumer Discretionary, and Energy would respond most dramatically to CPI releases, while Utilities and Materials are impacted most by ISM Manufacturing PMI.
It is interesting that sector sensitivity to macro events is the biggest for the biggest sectors, which also explains why the S&P 500 (and SPY) is so sensitive (the chart shows the relative market cap to illustrate this concept). Information Technology experiences the most volatility on average, while Energy and Real Estate, with lower market capitalization, are more stable during macro events.
How Can I Use This?
It is important to look at this kind of information ahead of economic releases to be aware of your portfolio’s general sensitivity to the event. For example, the FOMC Rate Decision on Wednesday should cause increased volatility across all equities, but a portfolio particularly concentrated in Information Technology may see the most dramatic movement.
It’s also valuable to use this to explore the need for potential portfolio hedges or search for speculative trades going into an event. One might even explore opportunities in the disparity between market implied volatility and this historical reference around events.
Regardless of how this information is most applicable to your investing or trading philosophy, being aware of upcoming events and their potential effects is a crucial aspect of market literacy.
We will be posting sensitivity analysis to events for key releases on our twitter feed going forward: @marketreaderinc