After a nice rally in reaction to earnings reports from the major banks, the Financials sector is taking a breather today after Morgan Stanley earnings disappointed the street.  In economic news, both Jobless Claims (213K vs 220K) and Philly Fed (17.0 vs 10.0) came in better than expected.  Read today’s Bespoke Morning Lineup below for major macro and stock-specific news events, updated market internals, and commentary.

Bespoke Morning Lineup – 1/17/19

In last night’s Closer report, we dissected the factors driving the market during the rally off the Christmas Eve lows using our decile analysis.  While some factors seemed to play little or no role in terms of performance, two that did were valuation and performance during the decline.

The first chart below shows the performance of S&P 500 stocks based on their valuations as of 12/24 with the most attractively valued (lowest P/E ratios) stocks to the left and the most expensive (highest P/E ratios) on the right.  The best performing decile by far was the one containing the stocks with the highest P/E ratios, and for the most part, performance steadily declined as you moved left towards the more attractively valued stocks.  The second chart shows performance since the lows based on stocks grouped according to how they performed during the market decline.  Here, the best-performing stocks were the ones that were originally down the most, while the worst performing stocks were the ones that held up the best during the decline.

In both cases, these performance results make perfect sense.  During market sell-offs, as investors become more risk averse it is typical to see stocks with the most aggressive valuations sell-off the hardest while more reasonably priced stocks hold up better.  However, when the market turns around and investors become less risk-averse, they flock to the more aggressive high growth/high valuation stocks.  Likewise, when the market shifts its tone from a defensive posture (during a sell-off) to a more offensive tone (rally) it is only natural that the stocks that held up the best during the defensive phase (like Utilities) underperform during the next more aggressive phase.  Anything else would be contrary to the norm.

We’ve gotten a handful of high profile earnings reports this morning, and the pace will only pick up as the week goes on.  Of the companies reporting this morning, though, the results have been mixed.  While Delta (DAL) and UnitedHealth (UNH) both exceeded forecasts on the top and bottom line, JPMorgan Chase (JPM) came up woefully short in terms of both earnings and revenues.  The more important thing to watch, though, is how the stocks react, and given the size of JPM’s miss, the reaction could have been worse.  As of this writing, it is trading down just 2%.

As with every earnings season, one of the most important metrics to watch is not necessarily how the companies report relative to expectations or even guide, but how their share prices react to earnings.  So far this earnings season, the results haven’t been great.

The chart below shows the one-day share price reactions for S&P 1500 companies reporting YTD (through Monday).  It’s a relatively small sample size (22 companies), but the median returns of companies reporting have been negative.  While the stocks have collectively seen a modest (and we mean modest) pop of 0.08% at the open, the median change from the open to close has been a decline of 1.67% for a median one day drop of almost 2%.  This isn’t a very encouraging start, but at this point in the last earnings season, the median one-day decline of stocks reporting EPS was closer to a decline of 4%.  So, it could be worse.