Don't bank on a bull run in 2021

Investors are convinced that the stock market party will continue this year.
By Morningstar |  04-01-21 | 

The year 2020 has been tumultuous and revealed how quickly things can turn around.

In one single calendar year, we witnessed the shortest bear market, a ferocious bull market, a recession and all-time stock market highs. The U.S. Elections and news of Covid-19 vaccines sent investors into a frenzy.

Ali Masarwah, editor at Morningstar Germany, reminds investors that there are alternatives to every scenario.

  • The bulls

Goldman Sachs recently predicted the S&P500 could rise by another 20% over 2021. Indeed, optimism prevails for virtually every risky segment of capital markets worldwide.

Felix Herrmann, a BlackRock strategist, also sees "turning points" after the U.S. election and the progress in vaccine development. These developments promise a "future with more health, more unity, more justice, more growth and above all: more predictability", he says.

Stefan Kreuzkamp, chief investment strategist at DWS, predicts that global economic output will reach pre-Covid 19 levels in less than three years.

Columbia Threadneedle is even more optimistic. "Given the strong efficacy of the vaccines from Moderna and others, we hope the recovery from the 2021 pandemic could be faster than we had initially assumed," says the firm’s chief investment officer William Davies. He thinks the pre-pandemic level could be reached as soon as early 2022 or even by the end of 2021.

Axa Investment Managers sees good opportunities for a transition "from a defensive bull market to a more aggressive, cyclical market” but DWS European continues to favour tech shares.

"We are going to continue to see a push higher," said Peter Essele, Commonwealth Financial Network's head of portfolio management, in an interaction with Yahoo Finance. He sees stocks in the early stages of a multi-year bull run.

  • Will this trend continue?

As central banks are now more than ever pursuing a very loose monetary policy to support the economy, flanked by an expansive fiscal policy on both sides of the Atlantic, one is rightly reminded of the situation in previous years when two scenarios dominated the capital market outlook of banks and fund houses at the end of the year: Goldilocks and TINA.

A “Goldilocks” scenario is when we experience robust economic growth, low inflation and steadily low interest rates. It’s a recipe for a bull market. Further support for that scenario comes from the bond markets. Although the prices of safe bonds wobbled when stock markets rose on vaccine news, bond markets proved remarkably stable otherwise this year. But if bond prices remain at a high level, then yields stay low.

That leads investors to TINA, an acronym which stands for "There Is No Alternative". In this case, there is no alternative to equities. The combination of low interest rates, fiscal spending sprees and stable corporate earnings could ignite a turbo for shares and give investors in risky assets a good year in 2021.

What’s the almost unthinkable alternative scenario? That we get a completely different outcome. For the majority of investors, this is clearly an outlier scenario.

But things could certainly get worse.

Perhaps bond investors are right with the unchanged pessimistic view on the state of the global economy, which is suggested by the current high prices in the asset class? According to this view, there could still be accidents on the road to economic recovery which would require a reassessment of risks. A re-escalation of the pandemic, which could cause the economy to collapse again, the lack of sufficient economic support from fiscal policy, which could be reluctant to push government deficits to ever new heights, and the associated devastating consequences for corporate profits. None of these scenarios are far-fetched.

Perhaps investors should dampen their euphoria and act with prudence as they did at the height of the Covid-19 crisis in the first quarter of 2020.

Add a Comment
Please login or register to post a comment.
Mutual Fund Tools
Ask Morningstar