Without wishing to disrespect Infosys (INFY) and Bank of South Carolina (BKSC), who reported last week, Citi (C) was the first major company to report earnings for the period ending in December when they did so this morning. It is always tempting to take that first earnings report as a sign of things to come for U.S. equities but in this case, it would be a mistake to read too much into Citi’s, or for that matter any bank’s results.
Other earnings due out this week and the progress, or lack thereof, on the government shutdown will have far more impact on your portfolio.
In the specific case of Citi, while they are headquartered in New York, they are a truly global business, so the headline numbers tell us very little about the state of U.S. business and economic conditions. In Q3, for example, only $5.1 billion of the bank’s total revenue of $18.4 billion were derived from North American consumer banking.
Global growth has been one of the concerns behind the recent market turmoil and digging deeper into the report should allay some concerns there, but neither the EPS beat, nor the revenue miss are particularly indicative of the economic state of America.
Also, much of the rest of the revenue of a bank like Citi is derived from trading, and in that respect Q4 can definitely be seen as an outlier. The report did blame the volatility in both equities and fixed income for reduced profits from that division, but the results are really specific to Citi as an institution.
In trading, volatility equates to opportunity, and how you fare in that kind of environment depends not on the direction of the movement, but whether you were positioned correctly during the move.
Even so, the big banks’ large holdings of stocks and bonds do mean that when those markets head south, profits are impacted negatively. A flat yield curve doesn’t help either as those same banks usually make money by borrowing short-term money cheaply and lending it out for longer periods at higher rates.
It is therefore reasonable to expect that revenue at other banks, such as Wells Fargo (WFC) and JP Morgan Chase (JPM), both of whom will report tomorrow, and Bank of America (BAC) and Goldman (GS) who report on Wednesday, may not meet expectations.
That doesn’t mean, however, that there won’t be clues early this week as to what to expect from what is shaping up to be a very important earnings season. The airlines Delta (DAL) and United (UAL) release Q4 results tomorrow and while they are also international companies, their performance will be more of an indication of how freely U.S. corporations and individuals are spending.
On the industrial front, the traditional bellwether Alcoa (AA) should be watched closely on Wednesday for clues as to how the trade dispute and resulting tariffs are impacting American manufacturing and metals.
There are some earnings to watch then, but the government shutdown will overshadow even that most basic of influences on stock prices this week. It is now the longest in history, and at this point the impact spreads way beyond just the government. Companies that need inspections of new plant and equipment can’t expand as planned, for example, and 800,000 people all tightening their purse strings at the same time has a big knock-on effect on a lot of businesses.
Up until now, the market had expected this to be like shutdowns past, involving a lot of posturing and blame throwing, but then being resolved by a compromise before any real damage was done. With both sides seeming to dig in deeper and move further away from each other every day though, that no longer looks likely. Historical data such as earnings are important, but markets tend to look forward and the view in that direction right now is not very pretty.
While earnings from the big banks and elsewhere are important, they are unlikely to dominate the direction of stocks this week. That dubious honor goes to the shutdown, and the lack of progress there suggests this will be another week when investors should be battening down the hatches and preparing to weather a storm.