In this tumultous market, there is a flash flood of journalists and pseudo-journalists explaining "why stock X is falling today". On a simple web search, the first bunch of results have X equaling Atlassian, Hanesbrand, WWE, Overstock.com, Southwest.
These authors all follow the same script. They look at each company's financial statements, or recently announced earnings report summaries, pull out some negative bits, and claim that those items are the causes of the sharp stock declines.
It's disturbing how little science there is in these pieces. Even the problem statement is completely warped. For example, the Motley Fool article takes the recently-popular format of a synopsis, starting with a one-liner on "What Happened." Eventually, the reader expects to hear an explanation of why it happened, and what does it mean for you.
So what happened according to the Motley Fool reporter?
"After the company reported third-quarter financial results that beat industry watchers' top- and bottom-line forecasts, shares in Southwest Airlines Co. (NYSE:LUV) are trading 8.2% lower at 2:15 p.m. EDT today."
This is one loaded statement. The causal link between the Southwest's 3rd quarter results and the drop in its stock price is already baked in. The reporter isn't asking if the 8.2% price drop is caused by the financial results, or how much of the drop can be explained by the results; the entire problem is framed such that the only possible conclusion is that the stock drop is caused by and only by those results!
PS. There is one scenario under which that problem statement is justified - if the stock price chart shows a steep plunge right after the earnings were announced. From the chart below, it appears that the drop started around noon, in fact, following a few hours in which the stock was trending up. (I'm not seeing where that 8.2% came from.)
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How would a statistician approach this question?
One starts with the overall market decline. Then estimate any excess decline of airline stocks versus the overall market. And if the decline hasn't been fully explained, then look for factors directly related to Southwest.
Your point is generally well-taken, but wrong in this specific instance. Particularly wrong around the time that earnings are released...
Your being wrong comes from not understanding where the -8.2% decline comes from. They are calculating it based on the close from the previous day. You are calculating the return relative to the opening price. What happens is that most companies report earnings after the market closes or before it opens. So the stock might have gapped down like -5% because analysts didn't like something in the earnings release.
There are few things you can do to isolate just the earnings impact. For instance, you can subtract out the impact of the market using an estimate of the beta of the stock and how much the market declined from the previous close to the open. This would isolate the stock-specific decline in Southwest. Then you could statistically test if this was a statistically significant change. Of course, most market participants would obvious recognize that a -5% decline on earnings day is statistically significant and don't need that analysis done. It's obvious.
The question, rather, is given that Southwest was down significantly, what was in the earnings release that analysts didn't like? Earnings and revenue were good for Q3. However, it seems like management has warned that 2019 costs are going to be ugly. So it's not a stretch to make the casual connection...
Posted by: John Hall | 10/26/2018 at 12:05 PM