Here’s the nasty surprise for equity investors next year, says fund manager

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While the markets may have incorporated a lot of that optimism, the rest of the year is unlikely to see big market declines, says Thomas H. Kee Jr., president and CEO of Stock Traders Daily and portfolio manager. at Equity Logic. But it’s happening in 2021, he told MarketWatch, in our call of the day.

The main reason is that Kee estimates that analysts’ earnings per share forecast for 2021 for the Dow Jones Industrial Average DJIA,
+ 1,59%
are too high. These DJIA EPS growth forecasts hover at 26%, up from 32% recently due to lockdowns that occurred during a COVID-19 fall wave. As those expectations decrease, as he would expect, the valuation risk increases, he says.

“Assuming the Dow stays exactly where it is now, and earnings reach 32% growth for the Dow in 2021. At the end of 2021, the price-earnings multiple for the DJIA will be higher than any other time since the credit. crisis, which means it will be extremely expensive, ”he said. The market could see a 25% drop under these circumstances, he said.

“And by the end of next year, you’re going to see some big drops in the market, even though everything is going to get back to normal,” Kee said after COVID-19. “When that happens it will be a surprise to most investors who expect everything to be extremely good next year. The truth is, this year should be worse, and it isn’t, because there has been so much stimulus.

By next year, investors will face economic hardship and central banks will halt stimulus measures (early to mid-year).

But he says Wall Street bankers will hold the market this year to ensure those bonuses arrive by the end – a weak third quarter scuttled them, he notes.

As to how to play that next drop in stocks, Kee is sticking to a strategy he recommended to this column in May – rotation between the S&P 500 ETF SPY,
+ 1,24%
and in cash. Keep doing this, he says, until you see signs that investors are recovering in an overvalued market.

The stock market action will matter the most, he says. “I watch for reversal signals and they come in all kinds of different shapes and sizes,” he says. A possible signal: Markets break above a high level of resistance, then retreat. It’s one of many, Kee says.

The steps

Dow YM00,
-0,69%
et S&P 500 futures ES00,
-0,55%
are declining, while the Nasdaq NQ00 futures,
+ 0,24%
crawl. European SXXP Equities,
-0,45%
are lower. The Nikkei NIK,
+ 0,41%
briefly hit a 29-year high, while China stocks 000300,
-0,19%
slipped. GBPUSD,
+ 0,41%
is on a report of a possible EU / UK trade deal next week.

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The buzz

Tesla TSLA,
-0,10%
the stock is up 12% in pre-market on news the electric car maker will join the S&P 500 next month. And the global online rental market Airbnb has announced a $ 1 billion initial public offering.

Amazon AMZN e-commerce retailer,
+ 0,07%
has launched an online pharmacy, which includes discounts for Prime members.

Home Depot HD Renovation Group,
+ 0,86%
reported better than expected profits and revenues. Walmart WMT Stocks,
+ 1,26%
are up after the retailer beats profit forecasts. Benefits of Kohl’s KSS,
+ 7,79%
are yet to come.

Retail sales and import prices, followed by industrial production, business inventories and a homebuilders index are ahead. Federal Reserve Vice Chairman Richard Clarida said on Monday evening the economy would likely need additional monetary and fiscal support.

Georgia’s secretary of state told the Washington Post that prominent Republicans, including Sen. Lindsey Graham, pressured him to reject legal presidential ballots. Meanwhile, the state’s vote recount has so far revealed 2,600 uncounted ballots, mostly for President Donald Trump.

Hurricane Iota hit Central America just days after Eta.

The Managing Director of Take-Two Interactive TTWO,
+ 0,34%
talks next-gen video games and more at Barron’s Investing in Tech Thursday at 1 p.m. Register here.

Random readings

Mute loved ones on Twitter TWTR,
-1,72%
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