The winter melt-up in stock markets has most investors only thinking of more easy gains for their portfolios in 2021.
But not so fast, bulls — one of the most rose-colored glassed Wall Street firms thinks several risks are brewing that could put a damper on the fierce rally.
Read more: How to build an investment portfolio to outperform the market
“The first week of vaccine distribution has proven that the logistics of proper delivery are complex and uncertainty remains around the number of doses that will be distributed in first half 2021,” cautions Goldman Sachs strategist David Kostin.
Kostin lists a rocky rollout of COVID-19 vaccines as one key risk to stocks. His other two risks stem from the potential return of inflation and policy uncertainty.
“Some investors have expressed concern that rebounding economic activity, additional fiscal stimulus, and sustained Fed asset purchases could lead to a spike in inflation and a rise in Treasury yields during 2021,” writes Kostin. “If Democrats win both Georgia Senate run-offs on January 5th, they would assume control of the Senate with a 50-50 split.”
An argument could certainly be made that investors are in no way considering the new risks presented by Kostin — essentially exposing portfolios to surprise losses. But who could blame the bulls for sporting their party hats ahead of New Year’s Eve bashes on Zoom given the sentiment in the market currently.
The Fed’s free money spigot won’t be closed anytime soon as Fed Chairman Jerome Powell looks to do his part to fight off the debilitating economic effects of the COVID-19 pandemic. This firehouse of easy money has proven time after time— and continues to do so — as being oxygen for equity valuations. Do you really think Tesla’s stock is up 730% this year because it’s making some profits (the quality of those profits are debatable no less) and it was just added to the S&P 500? Or bitcoin prices really deserve to be knocking on the door of $30,000?
Think again, cheap money from the Fed is doing its part to fuel speculation by traders in Tesla’s absurdly valued stock and the great unknown asset that is bitcoin. Sorry to burst your bubble, Tesla and crypto aficionados. But hey, the bulls love seeing this feverish action right now.
Meanwhile, lawmakers finally reached an agreement on a $900 billion stimulus plan that will include more direct checks to households. More checks could equate to a better trajectory for consumer spending in early 2021 after a general bust this holiday shopping season as nervous households cut back.
Score another for the bulls.
And then there is hope around global vaccination, thanks to the tremendous work out of Pfizer and Moderna. Many on the Street have modeled for half the U.S. population to be vaccinated by mid-2021, something that Bill & Melinda Gates Foundation Chair Melinda Gates tells me is a realistic projection.
To be sure, developments on the vaccine front is welcome news to weary Corporate America executives. They may see their financial statements roar back to life in the third quarter of 2021 as people decamp from their homes. With that financial revival may come the return of dividends (or hikes) and stock buybacks. And to that end, score another one for market bulls.
But the reality is not everything will go right in the world next year. And that means not everything will go accordingly to the plan the market has presently ginned up. Remember Kostin’s risks, bulls.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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