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Thus far this year, Wall Street has largely taken its trading cues from macroeconomic events, with concerns over trade issues, Federal Reserve policy, rising interest rates and bond yields, and other issues seeming to swamp single-stock factors for individual names.
Don’t be fooled, however: company-specific news remains pivotal to trading activity, particularly as the first-quarter earnings season continues to unfold.
The recent resurgence of macroeconomic issues—which led to a nearly unprecedented spike in correlations, meaning individual securities were moving in tandem despite differences in their underlying fundamentals—was something of a historic anomaly. According to Goldman Sachs, “Over the past few years, single stock volatility has become concentrated around earnings events. This reversed over the past quarter as macro volatility increased and non-earnings news was the primary driver for stock volatility.”
Despite that, the investment bank wrote, earnings remain a key trading event—one that may even be growing in importance. Typically, the average stock—in the first trading session after reporting its results—has a share-price move that is 2.4 times as big as its typical daily move. Last quarter, however, it rose to 2.9 times, indicating higher earnings-related volatility.
“We remain focused on buying volatility for known earnings events as they remain large predictable sources of volatility,” wrote Katherine Fogertey, an options strategist at Goldman.
Investors have no doubt observed examples of this thus far this season. Among notable examples of stocks seeing outsize volatility in the wake of their earnings, Philip Morris International Inc. suffered its biggest one-day percentage decline in 10 years after its results last week, while 3M Co. had its biggest one-day slump in nearly 11 years.
The high volatility around earnings shouldn’t come as a surprise to investors, as daily swings have been elevated all year, in contrast to the quiet trading seen over 2017. Even though 2018 is barely a quarter over, the Dow Jones Industrial Average and the S&P 500 have both already seen three times as many 1% moves as was seen over all of 2017. The Cboe Volatility Index is up nearly 70% year to date, though it remains below its long-term average of 20.