Bellwether (Trading Markets) - Explained
What is a Bellwether?
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Table of ContentsWhat is a Bellwether?How Does a Bellwether Work?Examples of BellwethersAcademics Research on Bellwether
What is a Bellwether?
A bellwether, often misspelled as bellweather, refers to an indicator or event which displays the likely presence of a trend. The performance of specific stocks/companies and bonds are seen by analysts to depict the condition of the financial markets and economy because their performance correlated greatly with a trend. Bellwether companies are always there market leaders in their various sectors. This word is a fusion of "bell" and "wether." Often shepherds hang bells around the necks of the sheep leading the flock so as to ascertain their location in the fields.
How Does a Bellwether Work?
A bellwether stock refers to a stock that's utilized in gauging the market's performance generally. A bellwether stock's status as a bellwether status might change eventually, but in the equities market, the biggest, well-established companies in an industry are usually the bellwethers. Usually, stable and profitable, the majority of bellwether stocks have proven themselves in an industry having established a customer base, as well as, unwavering brand loyalty. Some have shown resistance to economic meltdowns. Furthermore, these stocks form the bases of most major market indices; large-cap bellwethers dominate the S&P 500, the Dow Jones Industrials, and the NASDAQ. While bellwether stocks might indicate future developments, they aren't usually the sector's best investments. Immediately a company attains the bellwether status, its growth days of market-beating are always well behind it and its massive size makes significant expansion complex. Instead, investors might utilize bellwether stocks as indicators while in reality, investing their money in up-and-coming stocks, with high growth potential ahead of them, which they feel can be the bellwethers of the future.
Examples of Bellwethers
For years, General Motors was an instance of a bellwether stock, thus the quote, "What's good for GM is good for America." The company's quarterly financial results have long been considered a bellwether. FedEx is considered a bellwether for the economy as well. Strong earnings and revenues for FedEx imply strong business shipping and consumer activity, which ebbs and flows with the economy's strength. Shipping and rail stocks, according to history have been favorable bellwethers to the United States economy. Also, an alarming decrease in available stellar might hint economic recovery, since steel is utilized in manufacturing, as well as, building. Similarly, Alcoa Aluminum is a bellwether in that it functions in a cyclical industry, and huge earnings suggest a strong overall economy. Furthermore, Alcoa always tops the major companies in reporting its quarterly earnings, and its report is termed a bellwether for the corporate earnings season.
Academics Research on Bellwether
- Corporate governance in South Africa: abellwetherfor the continent?, Vaughn, M., & Ryan, L. V. (2006). Corporate governance in South Africa: a bellwether for the continent?.Corporate Governance: An International Review,14(5), 504-512. The recent onslaught of corporate scandals has compelled the world to acknowledge the profound impact of corporate governance practices on the global economy. Corporate governance is of particular concern in developing economies, where the infusion of international investor capital and foreign aid is essential to economic stability and growth. This paper focuses attention on corporate governance initiatives in South Africa, given its significance as an emerging market, its potential leadership role on the African continent and the countrys notable corporate governance reform since the collapse of apartheid in 1994. The evolution of the countrys corporate structure and the forces driving corporate governance reform over the past decade will be examined, followed by a review of the most notable reform initiatives in place today. Finally, an assessment of those initiatives will be presented, along with recommendations concerning how South Africas initiatives can serve as models of enhanced corporate governance standards for the African continent.
- Export activities and prospects of Hawaiianfirms, Hook Jr, R. C., & Czinkota, M. R. (1988). Export activities and prospects of Hawaiian firms.International Marketing Review,5(4), 51-57. Export activity has become an issue of national importance with exports from the Pacific region increasing dramatically over the past ten years. Within the Pacific region, Hawaii is of particular interest for US trade development purposes. This article investigates export activities and prospects of Hawaiian firms in order to obtain a better understanding of international trade.
- A Discussion of'What Do Management Earnings Forecasts Convey about the Macroeconomy?', Ogneva, M. (2013). A Discussion of'What Do Management Earnings Forecasts Convey about the Macroeconomy?'.Forthcoming in Journal of Accounting Research. While numerous studies in accounting and finance are devoted to predicting firm-specific earnings and understanding the forecasting behavior of analysts and management, it is unclear whether or how accounting information at the micro level can be applied to the macroeconomy. Bonsall, Bozanic, and Fischer , henceforth BBF, are part of a growing literature that seeks to address this question. BBF document that firm-specific management forecast releases are significantly positively associated with announcement-window aggregate stock market returns and further show that this significant market reaction is concentrated among bellwether firms. In this discussion, I argue that although BBF provide convincing evidence on the presence of timely macroeconomic information in management earnings forecasts, the exact nature of this information is somewhat of a black box. BBFs results also raise the question of how the macroeconomic information content of management earnings forecasts differs from that of realized earnings. The answers to these questions can help reconcile the significantly positive association between management forecast surprises and aggregate stock returns with the previously documented negative relation between realized earnings surprises and aggregate stock returns.
- Intra-industry information transfer effects of leadingfirms' earnings narratives, Cazier, R., Desir, R., Pfeiffer, R. J., & Albert, L. (2018). Intra-industry information transfer effects of leading firms earnings narratives.Review of Quantitative Finance and Accounting, 1-21. We investigate whether there are information transfers related to the narratives accompanying earnings announcements in the same way there are for bottom-line earnings numbers. Our study is motivated by the conjecture that the narratives accompanying earnings press releases may contain industry-relevant information beyond that conveyed by the earnings number. If so, we expect earnings narratives to trigger distinct information transfer to industry-related peers. Our empirical tests confirm that, after controlling for the earnings information transfer, when industry leaders report positive earnings news and cite external causes, industry peers experience share price increases. Conversely, when industry leaders experience earnings disappointments and cite external causes, industry peers experience share price declines. We also find that the level of industry concentration plays a significant role in these relationships. These findings add to our understanding of the dynamics underlying co-movement of share prices within an industry. Additionally, these findings provide insights into another (previously undiscovered) means by which earnings narratives have relevance for investors.
- Does earnings guidance affect market returns? The nature and information content of aggregate earnings guidance, Anilowski, C., Feng, M., & Skinner, D. J. (2007). Does earnings guidance affect market returns? The nature and information content of aggregate earnings guidance.Journal of accounting and Economics,44(1-2), 36-63. We investigate whether earnings guidance affects aggregate stock returns through its effects on expectations about overall earnings performance and/or aggregate expected returns. We find that aggregate guidance, especially relative levels of quarterly downward guidance, is associated with analyst- and time-series-based measures of aggregate earnings news. We find more modest evidence that guidance, again, largely downward guidance, is associated with market returnsmarket returns appear to respond to guidance toward the end of each calendar quarter, when most earnings preannouncements are released, and there is some evidence that firm-level guidance affects market returns in short windows around its release.