Impacts of Macroeconomic Factors on Sector Dynamics & Portfolio Optimization Strategies

This research evaluates the effects of leading and coincident economic indicators on economic sector dynamics and portfolio management strategies. Through the analysis of prominent economic indicators, specifically those accounted for in the Leading Economic Index (LEI) and the Coincident Economic Index (CEI), this study seeks to derive statistically significant correlational values to aid in the portfolio optimization endeavor. Ultimately, this study seeks to address the research question: “How do fluctuations in the Leading Economic Index and the Coincident Economic Index relate to the performance of various economic sectors? Our hypothesis postulates that economic sectors display consistent dispersive tendencies in periods of rising and falling LEI and CEI values, enabling portfolio managers to disproportionately capitalize on the ownership of equities within different economic sectors in various macroeconomic climates. Current literature suggests the characteristic of dispersion amongst various economic sectors in different economic climates, but much of the literature lacks depth and applicability. Utilizing statistical and regression analyses in conjunction with the Leading and Coincident Indexes, this research seeks to determine the extent to which these indicators influence short-term, isolated economic sector performance. The resultants of the research serve to directionally inform financial professionals in the portfolio management process. Ultimately, financial professionals should consider the implications of LEI and CEI fluctuations on portfolio optimization strategies during portfolio construction if our hypothesis is supported. If evidence supports our hypothesis, further research could explore how various sectors react to the subcomponents that make up the LEI and CEI including interest rate spreads and consumer expectations for business conditions.