Seasons of Finance

Earnings Season, Conference Season, Junior-Employee-Answers-the-Phone Season...

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Financial markets like to play fun games with time. Economists talk about how frustrating it is to compare stocks to flows (like taking the ratio of GDP to market capitalization), but the whole point of a stock market is to convert flows into stocks—a share price is just the estimated present value of future cash flows. They also play around with the passage of time: one way to understand the saying that "all correlations go to 1 in a crisis" is that a crisis is when multiple financially-mediated hundred-year storms all happen at once—the surprising rate hike leads to a surprising liquidity pinch, causing a surprising drop in stock and bond prices that causes a surprising cascade of margin calls. (The tightest OODA loop in the world is also the worst one—the feedback loop where one person's panic causes another person to panic.)

But there's another aspect of time that has market effects: the seasonality of a researcher or portfolio manager's job. Idiosyncratic volatility is concentrated around earnings events, so four times a year (+/-, as we'll get to in a bit) there's an opportunity for alpha in predicting earnings and slightly less alpha in reacting to them. And this drumbeat sets the schedule for everything else. There are a few companies that kick off earnings season in general, or earnings season for their particular sector: Delta reports earnings quite early in the quarter, typically about ten days in, and, at least pre-pandemic, provided high-level results a week before that. It's not uncommon for other airline stocks to react more to Delta's numbers and commentary than to their own quarterly report, since Delta has a fairly wide geographic and travel-type mix and these categories tend to mostly move together.1 Tech earnings season starts with Netflix, which is both the world's most operationally sound media company and the world's most media-savvy center of operational excellence. They tend to put on a good show, with a detailed shareholder letter, granular guidance, and, from time to time, tutorials on how to understand that guidance.2

Typically tech earnings season runs from the second through the fifth week of each quarter. Retail, on the other hand, is shifted back a month—mercifully, the retail fiscal calendar does not have companies closing the books and prepping their investor materials right at the peak of the holiday shopping rush. Big banks, in a weird act of anti-class solidarity, tend to cluster their reports in the same few days. And some companies report a bit later, like, which released its earnings on the 22nd. One result of this is that most of their business for the next quarter is already baked in; Booking's shares tend to react more to their next-quarter guidance than to current-quarter developments.

And then, in March, everyone in TMT land can take a vacation until the next round of earnings releases in early April.

Or not. Actually, the nature of the work just shifts: after earnings season, you move straight into conference season, where banks put together events where management meets with shareholders, sometimes in large open sessions that any attendee can drop in on, sometimes in smaller group meetings, and in a few one-on-ones. Some companies will update their guidance at conferences, though this behavior varies by both company and industry, but analysts at these events are mostly looking for three things:

  1. A wider surface area of potential companies to invest in. Like other kinds of conferences, an investment conference is a way for companies to get on investor's radars. For example, the general theme among small-cap tech companies’ conference presentations in the last year has been “by the way, did you know we’re an AI company?”

  2. General industry insights that will help investors understand the evolution of companies and their industries.

  3. "Body language," the general term for when companies accidentally update guidance by, for example, responding to a question about a big customer renewal by briefly grimacing before saying that negotiations remain in progress.

Conference season tends to produce a higher-volume of lower-quality content; the banks that organize these events know that investors are paying for access to management, and that management access is contingent on those managers liking the banks' analysts; if JPMorgan downgrades a big company, maybe that company's CEO will be the headliner at Goldman's next conference while it sends a CFO to the next JPM shindig. So there's a fair amount of mutual back scratching. And, unlike on earnings calls, there's rarely some proximate cause of outrage (like missing or lowering guidance), so the conversations often aren't as cutting or aggressive.

Companies host their own events, too, which are also generally scheduled to syncopate with the earnings cycle. Those events can be regularly-scheduled updates outlining their strategy or just giving investors a chance to ask broader questions than the detailed modeling-oriented ones they often get during earnings. Or they can be an opportunity for the company to outline a completely new strategy and pitch investors on why it'll work.

The last bit of market seasonality worth thinking about is vacations. The events calendar naturally gets a bit lighter when people are out of the office. Of course, business doesn’t grind to a halt just because the CEO is busy in Zug or something. Instead, there's someone more junior handling whatever comes up. This is one reason so many crises hit in August (Long-Term Capital Management in 1998, Amaranth in 2006, the "Quant Quake" of 2007, the acceleration of the financial crisis in 2008), and it’s why there's occasionally high volatility in the week between Christmas and New Years.3 Other holidays have an impact, too; companies like to release bad news the Friday before a three-day weekend (less media attention, fewer people watching their Bloomberg terminal, better odds that the story will simply be missed), but sometimes stories that break on the Friday after Thanksgiving have a bigger market impact the next Monday, instead, when everyone finally gets back to the office from their four-day mini-vacation, trawls through their inbox, and realizes they missed some market-moving news. 

Macroeconomically, the economy keeps on humming during these periods, but financial markets have network effects; people want to trade when other people are trading. So there are air pockets of volatility—a phenomenon you'll even see intraday sometimes (if news breaks around noon Eastern Time, it takes the market longer than usual to digest it, though continuous improvements in using AI to parse news have mitigated this effect somewhat).

In the very long run, this seasonality doesn't impact returns at all. But it's useful to understand the event path; to know when you're more likely to encounter which kind of catalyst, and to know when there will be more small-scale opportunities that last just long enough for a careful scalper to exploit them. These opportunities naturally show up at very inconvenient times—do you really want to spend a lot of your vacation hunched over a laptop looking for trades? But that itself is a kind of market efficiency: it's yet another case where you can trade leisure time for money or vice-versa.

Read More in The Diff

The seasonality of finance tends to affect The Diff’s publication schedule; we, too, have Earnings Season, Conference Season, and Out-of-the-Office Season.

1. Airlines do vary in their geographic exposure, of course, and sometimes this produces small outliers. I've always liked that United was big in Houston for example, because it means that when they're hurting because of high fuel prices, they're offsetting a tiny bit of this through oil industry-related travel. But in general, airlines are beholden to the same broad demand and cost trends.

2. Just to make things even more self-referential, one of their useful points early on was that in a high-growth subscription business, seasonality is invisible; if summer's gross subscriber additions tend to be 5% lighter than winter's, this isn't going to be visible when the business is more than doubling year-over-year. But as it slows down, those trends will be more visible, and can even lead to negative sequential growth in a business that's still expanding on an annual basis. They flagged this so early that investors had plenty of time to forget about it and to panic when Netflix finally printed a negative sequential subscriber growth number.

3. There's an amusing anecdote about this in The Buy Side, a memoir of trading and drug addiction. One thing some traders will do on the last day of the year is ramp up the value of some thinly-traded stocks they own and push down the value of stocks they're short. This can be predictable, and other traders will try to fade it. So the last thirty minutes or so of the last workday of the year are sometimes a series of tense poker games in small-cap land.

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