This morning the SEC issued an edict halting companies from reporting quarterly earnings. The reason provided was that this practice is costly, has become irrelevant and can confuse the public. Here is why.
Most companies issue guidance of expected earnings for its next quarter. This immediately causes analysts to react with their estimates of that company’s earnings which is usually different. Then when the quarterly earnings are reported there is more activity, particularly with spurious justifications. Each step of this process is costly and incites trading which has been shown to create no substantive stock price changes after three weeks. Further, the average nonprofessional investor is mistakenly led to believe that this information is important when in reality they are misleading meaningless gestures.
The SEC edict contended that the stock market has become more of a casino where “bets” are placed by professional gamblers. An SEC spokesperson was quoted as saying that a majority of trading takes place without regard to earnings at all which indicates irrefutably that earnings do not matter. Proof of earnings irrelevancy was the large daily and intraday swings in March 2020. Those buys and sells had nothing to do with earnings; all three major indexes generally had the same percentage daily ups and downs representing more of a herd mentality than thoughtful investing. Also the types of stocks, companies, or sectors were not distinguishable in the overall market swings.
The SEC spokesperson also pointed out that there is a growing number of Gamblers Anonymous chapters that now include stock market traders.
Other factors the SEC offered was that almost none, i.e. only 2 percent, of the total trading in March was done by individuals who invest either through their employer’s 401k or 403b plans and IRA accounts or for their own accounts and that this mirrors the entire 2019 percentage of trading volume from those accounts. The SEC also said that there are 55 million people with 401k and 403b accounts, 36 million households with IRAs as well as 20 million with brokerage accounts (with balances under $125,000) and these are considered by the SEC as long term investors who actually trade very little. Eliminating duplication in account ownership, the total individual investor accounts in the United States is believed to be about 85 million.
The SEC is not only concerned with the large volatility in March but the growing volatility over the last few years. A conclusion was reached that most of the trading was precipitated by outside events independent of the individual companies. The Coronavirus was presented as the current cause, but other causes cited were speculation about rate changes by the Federal Reserve, certain primary vote results, rioting caused by economic events in foreign countries, the just-ended Brexit and terrorist activity against United States targets. None of the latter and many more incidents are reflective of individual company earnings.
The SEC spokesperson added that the average investor has a long term horizon and eventually almost all stock values become reflective of earnings and dividends which is really how investors should look at their portfolios. The spokesperson also said that annual reporting, which would continue, should provide sufficient information for long term investors.
While the SEC pronouncement is effective immediately, there is a sixty-day period for interested parties to respond and penalties will only be assessed for noncompliance after June 1, 2020.
This blog was able to obtain a quote from Ed Mendlowitz just as it was about to be posted and he responded with a clear and resounding “Happy April Fools’ Day!”
Do not hesitate to contact me with any business or financial questions at [email protected] or fill out the form below.
Read More of the Partners’ Network Blog
