Just do what you did last month

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If you are a professional investor covering US or European stocks, you are about to come to the end of another busy earnings season. If you want to have a cheat sheet for the next couple of months in the markets, so you can relax a bit, today’s post may be for you.Jessica Wachter from UPenn and Hongye Guo from the University of Hong Kong found that US and global stock market returns, as well as industry returns, are predictable around the quarterly earnings season.Obviously, during earnings season, professional investors are overwhelmed with information and news about companies. In today’s markets, this information overload is a real problem because it is physically impossible to follow the news on every company in a diversified portfolio (if you have a very concentrated portfolio, that may not be a problem). Hence, we can’t really digest all the information companies are putting out, which gives rise to post-announcement earnings drift.But beyond that, there seems to be another effect. When a company is in the news in the month after their earnings results, it tends to be the same story as during the results announcement. There isn’t enough time for things to materially change. But investors still seem to be surprised by this news, and share prices react to the ‘news’.The result is that there is a statistically significant positive correlation between the market return in the first month of a quarter and the second month of a quarter. The chart below shows that on average, for every percentage point of excess performance by the US market in the first month of a quarter (in…