While the financial world is currently grappling with the ongoing impact of the coronavirus pandemic, the start of corporate earnings season could add yet another wrinkle to what has already been a chaotic start to the trading year.
Q1 2020 earnings season, which kicked off in full force this past week, will be especially interesting this time around because it will provide investors and traders with a first look into the financial health of publicly traded companies.
On one hand, these earnings releases will allow market participants to more easily identify the winners and losers from the early stages of the coronavirus crisis.
On the other hand, first impressions from this quarter’s earnings will be much like meeting a new colleague at work for the first time—superficial at best. That’s because earnings season for most companies is as much about reporting what happened in the most recent quarter as it is about providing guidance into earnings expectations for the remainder of the year.
In 2020, full-year earnings forecasts will be especially hard to come by, or at least hard to rely on, because there are so many unknowns in the current business environment.
As of now, nobody really knows when “normal” life will return to the world economy, with most estimates ranging between a few months (best case) to a couple of years (worst case). The latter estimate is based on an expectation that a global vaccine for COVID-19 would need roughly that amount of time to be tested, approved and manufactured.
Earlier this week, several of the largest banks in the United States released their Q1 earnings reports, and the results weren’t much to write home about. The primary themes emerging from big bank earnings suggested that profits were down significantly and that loan loss reserves were being increased substantially in preparation for a fresh wave of loan defaults.
These were the same ill tidings reported by financial institutions during the early stages of the 2008-2009 Great Recession.
On top of that, interest rates in the United States are also near all-time lows, and low-interest environments tend to be bad for banks from a profitability standpoint.
For now, it looks as though big banks have fallen squarely into the “losers” category in the wake of the coronavirus crisis. However, nobody really knows how long they could remain in that bucket, or what their earnings might look like during a global economic rebound.
Traders looking to get a better handle on all of the market sectors before earnings season may want to tune into a new episode of Tasty Extras on the tastytrade financial network when scheduling allows.
The focus of this particular episode is an overview of performance in the various S&P 500 sector exchange-traded funds, or ETFs, since the start of the coronavirus crisis. This includes a snapshot of not only the low points reached by each market sector (so far), but also the amount that each has recovered during the recent rally.
The first graphic below illustrates the respective performance of each S&P 500 market sector at its worst point in 2020. The second graphic reports on how each market sector ETF has performed during the recent rebound:
As one can see in the above two slides, the sectors that fell the most during the initial correction have also been some of the biggest winners during the recent recovery.
Depending on how the markets trade going forward, this may be an important nugget of information that investors and traders can use to their advantage.
Also included in this installment of Tasty Extras is a refresher on sector trading performance in the 2008 market correction. Therefore, traders looking for new ideas, or a fresh perspective on risk management, may benefit from a complete review of this particular Tasty Extras episode.
Circling back to the upcoming earnings season, it’s important to be aware that many companies will have a lot riding on Q1 2020, especially as it relates to how they guide earnings for future quarters. In that regard, traders may want to be extra careful when selecting and deploying earnings-focused positions.
To learn more about how options are often used to trade earnings events, this previous episode of Best Practices is also recommended.
Sage Anderson is a pseudonym. The contributor has an extensive background in trading equity derivatives and managing volatility-based portfolios as a former prop trading firm employee. The contributor is not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about topics covered in this blog post, or any other trading-related subject, to firstname.lastname@example.org.