Earnings a Big Test for the Markets

Summary

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WSJ Your Money Briefing: “Earnings a Big Test for the Markets”

Date: January 11, 2019
Host: Charlie Turner
Guest: Akane Ohtani, Markets Reporter, The Wall Street Journal

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Episode Overview

This episode analyzes the recent rebound in U.S. stock markets following the sharp sell-off at the end of 2018, exploring the drivers behind renewed investor optimism. Host Charlie Turner and WSJ market reporter Akane Ohtani discuss economic and policy signals, the impact of U.S.-China trade relations, expectations for forthcoming corporate earnings, and the ongoing volatility in financial markets as the new year begins.

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Key Discussion Points & Insights

1. Market Rally After 2018 Sell-Off

• Despite the government shutdown, major U.S. equity indexes posted strong gains for the week:
  • Dow and S&P 500 rose more than 2%
  • NASDAQ up more than 3%
  • Both Dow and S&P climbed out of correction territory
• The rally was driven in large part by a perception that markets had fallen too far in late 2018 without negative enough economic data to justify it.
• Investors are tentatively returning to risk assets but remain cautious due to persistent uncertainties.

Quote:

“We really saw a rebound from what some investors had been saying looked like oversold conditions. The sell off that we saw at the end of 2018 was really something and I think it caught a lot of people off guard.”
— Akane Ohtani [01:09]

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2. Impact of U.S.-China Trade Signals & Federal Reserve Policy

• Renewed trade talks between the U.S. and China—though inconclusive—relieved investor fears of escalating tensions.
• The Federal Reserve signaled more patience and willingness to pause on interest rate hikes, emphasizing flexibility over a preset course.
• Market participants see these two developments as key stabilizing factors.

Quote:

“For one, the US and China's agreeing to meet to discuss trade again... just signaled to investors that the two countries are still willing to talk about the issues that are at the table.”
— Akane Ohtani [02:12]

“We saw more signs from Fed officials throughout the week that they're willing to take a gradual pace when it comes to rate increases this year.”
— Akane Ohtani [02:24]

Memorable Moment:

• The acknowledgment that Fed Chair Powell’s flexibility was a relief after expectations that he might be less responsive to market conditions than predecessors.
  — Discussion at [03:20-03:53]

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3. Cautious Optimism and Upcoming Earnings

• While some profit warnings have surfaced (notably from Apple), 4Q2018 earnings expectations remain strong, with many analysts projecting double-digit growth for the S&P 500. If realized, this would mark the fifth consecutive quarter of double-digit profit growth.
• Investors and analysts are particularly interested in corporate commentary on future outlooks, as trade war effects and global growth concerns linger.

Quote:

“Analysts still think that we're going to see double digit growth for the fourth quarter, which would mark five straight quarters... But then on the other hand, we have been hearing warnings from different companies... that have really spooked the markets.”
— Akane Ohtani [05:01]

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4. Market Volatility: Decline or Dormancy?

• The VIX volatility index experienced one of its biggest retreats at the start of a year, following dramatic swings at the close of 2018.
• Despite apparent stability, guests express caution, noting “things could very much change at a whim” due to extreme moves in all markets recently.

Quote:

“We certainly have seen a huge retreat in the VIX... But again, the scale of the moves across all the markets has been so extreme lately... things could very much change at a whim.”
— Akane Ohtani [05:49]

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5. What to Watch Next Week (Preview of Upcoming Earnings & Economic Data)

• Major bank earnings are about to be reported: American Express, Goldman Sachs, Citigroup, JPMorgan Chase, Wells Fargo, Morgan Stanley, Bank of America.
• Tech highlight: Netflix reports earnings.
• Also reporting: UnitedHealth, United Continental (airline).
• Economic reports may be delayed by the government shutdown; however, key ones to watch include:
  • December Producer Price Index (Tuesday)
  • NY Fed’s Empire State Index (Tuesday)
  • Philadelphia Fed’s regional manufacturing survey (Later in the week)
  • National Association of Home Builders January Index
  • Fed’s December industrial production and Beige Book
  • Univ. of Michigan consumer sentiment index

Quote:

“Fourth quarter earnings season is starting up in the new week. The financial sector is well represented... The big tech earnings report of the week comes from Netflix...”
— Charlie Turner [06:37]

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Notable Quotes & Timestamps

• “We really saw a rebound from what some investors had been saying looked like oversold conditions.” — Akane Ohtani [01:09]
• “It seems like stocks have been starting to try to stabilize from the selling pressure that we saw at the end of 2018. But there's so much up in the air, especially with banks starting to report their results...” — Akane Ohtani [04:12]
• “The numbers may be relatively strong, but what officials say may be a little bit bleaker.” — Akane Ohtani [05:24]
• “Things could very much change at a whim.” — Akane Ohtani [06:21]

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Tone & Style

• Calm, analytical, and clear; the conversation remains focused on facts, investor sentiment, and what current news means for listeners' financial outlook.

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Summary Table: Important Segments

| Segment Topic | Speaker | Timestamp | |---------------------------------------------|-------------------|--------------| | Market Rally Analysis | Akane Ohtani | 01:09–01:53 | | Trade and Interest Rate Developments | Akane Ohtani | 02:12–03:20 | | Fed’s Stance on Volatility | Akane Ohtani | 03:23–04:04 | | Risk Appetite & Cautious Sentiment | Both | 04:04–04:40 | | Corporate Earnings Outlook | Akane Ohtani | 05:01–05:44 | | State of Market Volatility (VIX) | Akane Ohtani | 05:49–06:26 | | Upcoming Reports/Earnings to Watch | Charlie Turner | 06:37–07:49 |

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In short:
This episode prepares listeners for a pivotal earnings season by reviewing the market’s quick rebound, analyzing the forces behind it, and pointing ahead to both corporate results and economic data that will test whether 2019’s early optimism is sustainable.

Transcript

[Commercial Announcer]

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[Charlie Turner]

With your money briefing. I'm Charlie Turner in New York for the Wall Street Journal. Stocks rallied from earlier declines Friday, but the major averages ended a bit lower, snapping a five day streak. The Dow Jones Industrials lost five points, the NASDAQ Composite dropped 14 and the S&P 500 fell a fraction. Winning issues still topped losers overall and it was a strong week for stocks. Both the Dow and S and P, which climbed out of correction territory Thursday, gained more than 2% on the week. The NASDAQ added more than 3%. Akane Ohtani is markets reporter for the Wall Street Journal and she joins us in our studio. Connie, the markets put in a pretty impressive performance this week despite the government shutdown which showed no signs of ending. First of all, why don't you tell us what drove the market gains?

[Akane Ohtani]

Well, we really saw a rebound from what some investors had been saying looked like oversold conditions. The sell off that we saw at the end of 2018 was really something and I think it caught a lot of people off guard. As you know, we ended the year with the S&P 500's worst annual performance since 2008. That kind of selling pressure, I think some folks were saying was not warranted by the economic data that we were seeing in the U.S. i mean, it has been mixed, it has been volatile around the world. But generally I think folks believe that we still have at least a year left of good steady growth here. So to some extent there was a little bit of people coming back into the market after a pretty dramatic selloff.

[Charlie Turner]

Yeah, I mean, the Dow industrials are up 10% since the low point on Christmas Eve, which was a terrible session, and they've risen about 7% over the past three weeks. I guess signs of a break in the frosty relations between the US And China on the trade front and some fairly hopeful signs from the Fed on interest rates.

[Akane Ohtani]

That's right. Those were two other developments that I think really encouraged investors in the past week. For one, the US And China's agreeing to meet to discuss trade again, even though it didn't necessarily lead to a concrete resolution. It just signaled to investors that the two countries are still willing to talk about the issues that are at the table. There was a little bit of relief that there wasn't a last minute cancellation. Then with regards to the Fed, we saw more signs from Fed officials throughout the week that they're willing to take a gradual pace when it comes to rate increases this year. That's kind of messaging that we've been hearing more and more of in the last couple of weeks is the markets have really swung and we've seen economic data coming in mixed. I think it's something that investors are really taking to because there was such an emphasis on the Fed last year and this real fear that they were going to move too quickly for the economy and for the markets. But we saw Fed Chair Powell really emphasizing that policy is not on a preset course. And the central bank does have room to pause if the economy shows further signs of deteriorating.

[Charlie Turner]

I get the feeling that the Fed is paying attention to the markets.

[Akane Ohtani]

Yeah. And it's something that Powell was not expected to necessarily be as sympathetic to as his predecessors. And he has said things along the lines that sort of suggest that the central bank is not there to just bail out the market. They're there to really step in when the economy shows signs of fading a little bit. And that can include volatile periods in markets. But just because we see a 10% drop in stocks doesn't mean that the Fed is going to step in and make a sort of declaration about its rate increases. So I think people were a little bit, I guess, relieved to find out that he is clearly watching and acknowledging the volatility in markets.

[Charlie Turner]

So is this sort of back to normal a sign that investors are embracing risk again? The so called risk off trade is off.

[Akane Ohtani]

I think we'll still have to wait and see. Through the trader's notes that I've been getting, there is a sense that we have found a little bit of a bottoming out process in the last couple of days. It seems like stocks have been starting to try to stabilize from the selling pressure that we saw at the end of 2018. But there's so much up in the air, especially with banks starting to report their results in the coming weeks and a lot of earnings reports starting to come in that could really sp some more volatility in the markets.

[Charlie Turner]

Yeah, we did get one bit of good profit news on Friday. You know, General Motors boosted its earnings guidance for 2018 and predicted a stronger performance for this year. But you mentioned it. Could that be where the good news ends for fourth quarter corporate earnings reports? After all, trade uncertainties led analysts last month to downgrade their corporate earnings estimates.

[Akane Ohtani]

I guess it depends how you interpret the numbers because analysts still think that we're going to see double digit growth for the fourth quarter, which would mark five straight quarters that we've seen double digit earnings growth for the S&P 500, which really shouldn't be dismissed. But then on the other hand, we have been hearing warnings from different companies, including Apple, that have really spooked the markets and given investors a sense that the coming quarters are not going to be as strong as what we saw in 2018. And that's partially to do with the trade war, partially to do with slowing growth around the world. So I think we'll be watching very closely what the commentary is like on the earnings calls because the numbers may be relatively strong, but what officials say may be a little bit bleaker.

[Charlie Turner]

What about stock market volatility, Akani? Is that a thing of the past or are we in store for more of it?

[Akane Ohtani]

Well, we certainly have seen a huge retreat in the vix, which people sort of look to as a barometer of expectations for swings in the stock market. So I saw earlier that it was on track for one of its biggest retreats at the start of a year ever, which is pretty remarkable given how volatile things were at the end of 2018. But again, the scale of the moves across all the markets has been so extreme lately, terms of the selling that we saw the rebound that we've seen this week and then the moves in the VIX back up and down. So I think there's sort of a sense that things could very much change at a whim.

[Charlie Turner]

Wall Street Journal markets reporter Akane Ohtani. Thanks a lot, Akane.

[Akane Ohtani]

Thanks for having me.

[Charlie Turner]

Fourth quarter earnings season is starting up in the new week. The financial sector is well represented with American Express, Goldman Sachs, Citigroup and JPMorgan Chase weighing. Also keep an eye on profit reports from Wells Fargo, Morgan Stanley and Bank of America. The big tech earnings report of the week comes from Netflix, and we'll Hear from insurer UnitedHealth and airline giant United Continental. With the government shutdown seen extending into the new week, several economic reports will likely be delayed, so here's an incomplete list. On Tuesday, the Labor Department will issue its December Producer Price Index. That same day, the New York Federal Reserve releases its January Empire State Index, a survey of manufacturers in New York State. Later in the week, we'll get a similar manufacturing survey from the Philadelphia Federal Reserve. We'll find out how home builders are feeling when the national association of Home Builders issues its January housing market index. The Federal Reserve comes out with December industrial production figures as well as its latest Beige book economic survey of regional banks, and will get the mid January consumer sentiment index from the University of Michigan. And that's your money briefing. I'm Charlie Turner in New York for the Wall Street Journal.

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