Maybe you’ve seen the classic cartoon that goes like this: Bugs Bunny and Daffy Duck, chased by the hunter Emler Fudd, start arguing over which animal Elmer is supposed to be hunting.
“Duck season!” Bugs yells.
“Rabbit season!” Daffy insists. And they continue back and forth until Bugs cleverly switches his response to “Rabbit season!” At this point Daffy Duck counters with the only logical response… “Duck season!”
And Elmer promptly shoots his foolish prey.
There is another, equally confounding (and sometimes comical season) you may have heard about: “Earnings season!”
Every company that issues publicly-traded stock is required by law to report about its financial wellbeing to investors and regulators, once every quarter. While every company has its own fiscal calendar and different companies report at different times, most companies stick to straightforward calendar quarters so major earnings reports tend to bunch together every three months.
In theory, the effects of this should be simple for investors: a company that posts a good performance should logically see stock gains, and a company that posts a poor performance should see stock losses.
But investors tend to view earnings reports through the lens of their expectations. A company that does well might be seen as a disappointment by investors who expected even better from it. And even when a company beats consensus expectations, some investors may second-guess the consensus and bet on an even bigger blowout.
All of this is to say that earnings season can be a very volatile time. Stock prices often swing wildly up and down in response to earnings reports, often in ways that are confusing or counterintuitive. If you listen to market commentary you may hear many different (often contradictory) explanations for why a company dropped on seemingly good earnings or rose on seemingly bad earnings.
It is a confusing experience, and trying to make sense of stock moves during earnings season might make you sympathize with Elmer Fudd.
While it can be alarming to witness stocks jump like this in the middle of earnings season, over the long run, much of that volatility will be forgotten. Ten years from now, do you think you will remember what one of your stock holdings did in response to one earnings report many years ago? The big investment news stories worth remembering will be about bigger news than a quarterly earnings report.
We already know stock investing involves volatility—and some of it comes around like clockwork every three months. Clients, if you are ever wondering about sudden market moves, give us a call before anybody goes daffy.
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