Winter is Coming & White Walkers May Return? 2018 Musings
Dear Readers,
I’m sure by now you’ve gotten over the vacation blues and have given up on your New Year resolutions. As you are inundated with tons of articles and emails as to the “Best of 2017” and “Here’s what’s in store for 2018” etc., here’s another attempt at crystal ball glazing.
Year 2017 was a political potboiler that would put even Game of Throne’s twists and turns to shame, what with real/imaginary nuclear threats, meddlings, exits, and uprisings. In the corporate world, we saw mega-mergers & announcements, high profile exits, robust hiring, and of course greed! And, to everyone’s surprise, the equity markets stayed the course and recorded all-time-highs!
Aswath Damodaran, Professor of Finance at the Stern School of Business at NYU, is widely considered as the Mother Teresa of Data and a Valuation Guru. And for the last 26 years, at the first week of every year, he painstakingly collects data on all publicly traded companies and does the mind-bogglingly insane number crunching.
He mapped out the year to look at how stocks performed on a month by month basis through the entire year. The return on the S&P 500 for the year was 21.65%, with price appreciation accounting for 19.43% in returns and dividend yield representing the remaining 2.22%.
He further breaks down the data by comparing the earnings, dividends, and cash returned in 2017 by the S&P 500 companies vs. 2016.
Aswath says, “When stocks have as good a year as they did in 2017, you would normally expect the fundamentals to weaken, at least relative to prices, but stocks ended the year in a healthier state than at the start.”
He concluded his 2017 analysis and had this to say about 2018 — “There has never been a time in the last three decades where I have felt sanguine about equity markets and I am thankful for that, since that is a sure sign of denial about the risk that is always under the surface, with stocks. That said, my worries shift from year to year and in this new year, I will continue to watch how the changing tax code will play out in both earnings and cash flows, since both are likely to be significantly affected, the former, because a lower tax rate should raise after-tax earnings, and the latter, because of the release of hundreds of billions of trapped cash.”
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