E Tuesday Talk: A January Jolt To Start The Year

"EPS growth and stock prices don’t always match if you’re looking at data by year. As you can see from the table below, in 3 out of the 7 years EPS fell, stocks were up. In 5 of 9 times the stock market fell, EPS growth was positive. We will likely see very strong stock price growth and weak returns in 2021."

Regarding the current economic outlook, Galt includes the latest weekly economic index provided by the NY Federal Reserve which "is continuing to show better growth. In the week of December 26th, the yearly growth rate improved to -1.32% from -1.95%. "  Here is the graph:

Galt's current concluding outlook for the year ahead is as follows:

"EPS is likely going to rise sharply in 2021, but stocks will pull back especially the overvalued names such as Tesla (TSLA). We will see a multiple contraction that makes stocks cheap again. Given the spike in EPS that’s coming, even a 10% rise in stocks will make them cheaper on a trailing basis...Tobacco stocks are very cheap. They are hated for ethical reasons, but their bonds are still getting capital. Many think they will outperform in 2021, with Altria (MO) doing particularly well."

Craig Lazzara in an interesting piece entitled Persistence notes that investors who had the fortitude to bear the market storms of 2020 ended the year by being handsomely rewarded. He includes the following chart of the S&P 500 over the last 30 years for illustrative purposes.

Lazzara notes "Even in extreme declines, standing firm can pay off. There have been ten years (including 2020) when the S&P 500’s peak-to-trough decline exceeded 15%; in half of them, the market finished in positive territory. A year later, the gain from the bottom averaged 38%. Market history tells us that selling can be most damaging precisely when it’s most tempting. The key to success in 2020 was resisting the urge to panic when panic seemed like the most reasonable path." 

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William K. 4 months ago Member's comment

Once again a healthy collection of information and insights

David Marshall 4 months ago Contributor's comment

Thanks, William

Kurt Benson 4 months ago Member's comment

Thanks David Marshall, really enjoy this weekly column.

David Marshall 4 months ago Contributor's comment

Thanks, Kurt.