Individual stocks are getting a much bigger-than-usual jolt out of earnings
|Date | 25-01-2018 - 10:44 AM||Article Type | Stock Markets||Region | United States|
Overall market volatility has been near historic lows
The U.S. stock market is going through a historic period of quiescent trade, but individual stocks are liable to see a much bigger jolt than usual from quarterly results as fourth-quarter earnings season moves into full swing.
According to Goldman Sachs, earnings have been gaining in potency as a market-moving event for companies, even if those moves don’t translate to the broader market. Last quarter, the one-day move for a stock in the first session after it reported results was 4.3 times larger than its average trading day. That’s well above average: going back to 2000, the impact of earnings was a daily move just 2.6 times larger than average.
“Stock volatility has become increasingly concentrated on earnings days,” the investment bank wrote to clients.
Among recent examples, Netflix Inc. NFLX, +4.40% spiked after reporting blockbuster subscriber growth in its results, while Texas Instruments Inc. TXN, -8.50% tumbled more than 7% in premarket trading on Wednesday after delivering a modest outlook.
That concentration comes at a time when overall market volatility has been near historic lows.
According to the WSJ Market Data Group, the absolute daily percentage change for the Dow Jones Industrial Average DJIA, +0.16% was 0.31% in 2017. It was 0.3% for the S&P 500 SPX, -0.06% In both instances, that represents the smallest absolute daily percentage change in 53 years. For the Nasdaq Composite Index COMP, -0.61% , the absolute daily percentage change was 0.44% last year, the smallest since 1989.
Separately, the average observed one-month volatility in the S&P 500 last year was lower than any other year since 1970, according to S&P Dow Jones Indices, and the Cboe Volatility Index VIX, +3.33% has consistently traded under its long-term average of 20, often trading at less than half that average. The Vix last traded at 11.08.
This quiet hasn’t meant a sideways market, but one where equities have moved higher in a nearly nonstop fashion. Of the 15 trading sessions in 2018 thus far, the S&P has closed higher in 12 of them. Furthermore, each of those 12 positive sessions has represented a record close; the benchmark U.S. index has never had so many records in the month of January, and the uptrend builds on the dozens of recordsposted over the course of 2017. The index has gone a historic length of time without falling 3% or 5% from a peak.
That individual stocks may be seeing bigger earnings-driven moves at a time when overall market volatility is low may seem contradictory, but market analysts have been observing a related trend for a while, noting that correlations, or the degree to which two different securities move in tandem with each other, have dropped sharply of late.
For the S&P 500, correlations are at 0.1, according to data from S&P Dow Jones Indices, well below its median read, which is close to 0.35. A reading of zero would represent no correlation whatsoever, while a read of 1.0 would represent perfect correlation (a reading of negative 1 would mean perfect inverse correlation).
Volatility is elevated in periods of high correlations because stocks move in the same direction at the same time, and such broad-based moves are reflected in the major indexes.
“When sectors move more independently, actual volatility will drop (everything else equal) as marginal winners offset losers,” wrote Nicholas Colas, co-founder of DataTrek Research, who called correlations the “secret sauce” in equity-market volatility earlier this month.