The stock market has been in a smooth glide higher ever since the U.S. presidential election last month. But volatility could return in a big way in January as companies update their earnings outlooks, Goldman Sachs wrote on Wednesday, emphasizing that health-care stocks could be particularly vulnerable to swings.
The first month of the year is the most popular time for companies to update guidance, the investment bank wrote in a note to clients. According to Goldman, which looked at more than 2,700 updates from U.S. companies since 2011, 23% of the average total year’s updates were done in January. That month’s rate was nearly twice the level of the next-highest month. Of the January changes to forecasts, a heavy percentage came from the health-care sector.
Charts looking at the rate of earnings preannouncements by month, as well as by sector.
The week of January 13, 2017, is expected to be particularly active; historically, nearly 20 companies in the sector have issued preannouncements in that week of the month.
“Many health-care companies use January analyst days and conferences to update guidance for the year,” the firm wrote. “In fact nearly half of all guidance updates that were outside of earnings events over the past six years occurred in the first four weeks of the year.”
The research, led by Katherine Fogertey, an options strategist, speculated that “management teams may feel compelled to provide updates ahead of presentations at financial conferences, medical conferences and/or company-organized analyst meetings that occur alongside these events.”
Still, changes to a company’s outlook are often unscheduled, and can result in price volatility as traders and fund managers adjust their holdings depending on the new growth expectations. The firm cited four companies—Amgen Inc. AMGN, -0.56% Hologic Inc. HOLX, +0.15% Illumina Inc. ILMN, +0.74% and Regeneron Pharmaceuticals Inc. REGN, -1.39% —that it sees having volatility potential not yet recognized in options-market pricing.
For both Hologic and Regeneron, Goldman suggested buying February straddles—an options strategy where an investor buys a bullish call option and a bearish put option at the same strike price, betting that a stock will move by a certain amount, rather than in a particular direction. A straddle is essentially a bet on stock volatility.
“The options market is missing the potential for shares to make big moves in early 2017, in our view,” the investment bank wrote about Regeneron. “Despite the potential for significant volatility in the beginning of the year, Regeneron three-month implied volatility of 37% is in the 46th percentile over the past year and 5 points below realized volatility.”