Trying to make sense of stock moves during earnings season might make you sympathize with Elmer Fudd.
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. They continue this way until Bugs seamlessly switches his response to “Rabbit season!” At this point Daffy Duck counters with the only logical response… “Duck season!”
Elmer promptly shoots his foolish prey.
And now everyone’s shouting, “Earnings season!” Each company that issues publicly-traded stock must report about its financial wellbeing quarterly. In theory, the effects of this process should be simple for investors: a company that posts a good performance should see stock gains, and a company that posts a poor performance should see stock losses. Right?
But many folks view earnings reports through the lens of their expectations. A company that does well might still seem like a disappointment to those who expected even more from it. And when a company beats consensus expectations, some investors may second-guess the showing and bet on an even bigger blowout.
Stock prices can swing wildly up and down in response to earnings reports, with less logic than the duck season, rabbit season debate. If you listen to market commentary you may hear many different (even contradictory) explanations for why a company dropped on seemingly good earnings or rose on seemingly bad earnings.
Zoom out: ten years from now, do you think you will remember what one of your stock holdings did in response to one earnings report those many years ago?
The big investment news stories worth remembering will be about bigger issues 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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