Markets expect a perfect 2021. Will they get it?

Date: 30 Nov 2020

Author(s): Julia Horowitz
Source: CNN

 

Progress of COVID-19 vaccines are fiercely underway, and adding on to the record-breaking heights of US stocks on Friday, the outlook of the economy seems to be on the up and up. With investors foretelling that the economy will spring back in 2021, shoppers have returned with a spending frenzy and padding corporate profits. Additionally, banks are also echoing the same sentiments in their 2021 forecasts with a sharp “V-shaped” recovery soon.

"Following encouraging early vaccine efficacy data, we remain confident that vaccines will be widely available by the second quarter of 2021," UBS said in a report for clients titled "A Year of Renewal." "This should help put Europe and the US on the path to a sustained recovery. Economic activity in China has "already largely normalized," strategists added.

There is definitely hope on the horizon, with both bio companies Pfizer and Moderna having applied for / applying for authorization to distribute its coronavirus vaccine.

But with financial markets pricing in perfection, there's little room for error. And plenty of real risks remain.

Shaky confidence: In many respects, the recovery is a confidence game, Berenberg Bank's Holger Schmieding noted Monday. Spending resumed quickly as soon as spring lockdowns ended. But Schmieding wonders: "What if consumers and businesses, twice bitten by the pandemic, stay much more cautious for much longer after the second wave than after the first?" "Unlikely," he added, but it can't be ruled out.

Vaccine distribution: Creating safe and effective vaccines is the first step to returning to normal. Distribution will be a deciding key factor, which is susceptible to major logistical challenges, and take-up.

Stimulus woes: Central banks have made clear they intend to keep their foot on the pedal, but the appetite for generous government spending — particularly in the United States, which has deferred fresh help since March — may be waning. Smaller aid packages could shake consumers when it matters most.

Return of inflation: Low inflation has allowed central banks to provide unprecedented economic help. But if inflation spikes faster than expected next year, they could be forced into a tight spot. Economists don't expect this problem to materialize in 2021, but they're keeping close watch.

Even with these various risk factors in play, these do not take into account the And all this says nothing about the prolonged effects of a harsh winter, which could feed unemployment and deepen scarring for vulnerable businesses like restaurants, hotels and airlines.

Bank of America notes that a lot of bullishness on vaccines is already priced in. Its strategists think stocks are still the place to be — not least because low-yielding bonds look like a lousy alternative — but point to vaccine execution and delayed stimulus as potential speed bumps.

"Disappointment around vaccine success, distribution timing, cold weather case counts, and stimulus gridlock could pare this optimism," they told clients last week.

 

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