4 Risks That Could Prevent the Stock Market from Performing Well in 2021

By Devone McLeod, CFP^®, December 11, 2020

In just a few weeks, one of the craziest stock market years in history will come to an end. Just to recap this wild investing year, here are a few highlights:

• West Texas Intermediate crude oil futures briefly fell into the negative¹
• The quickest bear market decline of at least 30% in stock market history²
• The fastest bear market rebound from a bottom to new highs in history³ 
   

And yet, despite the economic chaos and disruptions in the stock market, the S&P 500 is on track for a double-digit gain in 2020.⁴ With various COVID-19 vaccines on the forefront, most evidence indicates that 2021 will be another growth year for the stock market.

However, nothing is guaranteed, and a few factors could prevent a surge in the market. So, it’s important to maintain a diversified portfolio that mitigates your risks.

Here are 4 risks that could prevent the stock market from performing well in 2021.

1. If COVID-19 Cases Continue to Soar

There will always be events that drive some form of market volatility. Arguably the most obvious risk to the stock market crash in the coming year is the threat of increased COVID-19 cases—and additional business lockdowns.

If COVID-19 cases keep rising, business closings, job losses, and weak consumer spending in the first quarter could have lasting economic consequences. Moreover, disappointing corporate earnings could cause equities to lose significant value.

2. If Vaccine Distribution Gets Delayed

A vaccine that protects us from COVID-19 offers the greatest promise of a return to normalcy and full economic recovery—a potential boon to the stock market.

Earlier this week, the FDA confirmed the safety and efficacy of the Pfizer-BioNTech COVID-19 vaccine, which is purported to be more than 90% effective, based on trial data.^5,6 FDA approval may be imminent.

Across the pond, vaccinations have already begun. CNBC reports:

Ninety-year-old Margaret Keenan on Tuesday became the first person in the world to receive the Pfizer-BioNTech vaccine outside of trial conditions. The new shot was approved by the U.K. drug regulator last week.⁷

While this is encouraging news, the war against the novel coronavirus is far from over. Potential setbacks that could create market volatility in 2021 include:

• Manufacturing or distribution delays
• Public distrust preventing widespread adoption
• The vaccine protecting individuals for only a short time
• Unforeseen risks or side effects
• Evidence that a vaccinated person can still spread COVID-19 to others
   

Let’s hope for the best—and prepare for volatility.

3. If the Federal Reserve Raises Interest Rates

Oftentimes, market cycles end with excess inflationary pressure. The Federal Reserve then prevents prices from rising too quickly by raising interest rates. Borrowing becomes less attractive, the money supply tightens, and the demand for goods and services falls. All of which keep rising prices in check but generally cause the stock market to drop.

Right now, we see the opposite. The Fed doesn’t appear even close to raising interest rates.

However, that could change. The Fed continues to pump a lot of money into the monetary system. If the economy really heats up, and that money starts to move very quickly, that’s when the demand rises faster than supply—and inflation becomes a problem.

And, if the Fed attempts to cool the economy down with higher interest rates—the stock market will probably take a hit.⁸ 

Global Market Strategist Brian Levitt explains:

4. If We Don’t Get A Stimulus Bill

The fourth risk to the stock market in 2021 is government inaction, or an insufficient economic stimulus package passed by Congress.

Thousands of businesses face closure. Millions of households struggle to pay the bills and put food on the table. With the latest rise in new COVID-19 cases, more economic lockdowns will probably worsen these troubles.⁹

Will the U.S. government provide support?

Economic recovery will occur at some point regardless of government intervention, but a stimulus could make the rebound a lot faster.

Levitt and Bob Reby, CFP^®, discussed the impact of low interest rates last month:

A Wise Long-Term Investment

While several risks could stunt the stock market in 2021, overall, we still consider equities to be a solid investment for most investors—especially those with an eye towards long-term goals.

Additionally, a few asset classes are especially well positioned for growth due to an economic catalyst we haven’t seen in 12 years. Learn more about the three assets classes that Brian Levitt believes are wise investments in 2021 in next week’s blog.

In the meantime, if you would like a second opinion on your current investment strategy, portfolio, or risk tolerance, please do not hesitate to reach out.

Sources:

1. _{https://www.ft.com/content/b474224a-84bd-4824-b4d3-4824463d5015}
2. _{https://www.cnbc.com/2020/03/23/this-was-the-fastest-30percent-stock-market-decline-ever.html}
3. _{https://www.reuters.com/article/us-usa-stocks-s-p500-bear-graphic/say-goodbye-to-the-shortest-bear-market-in-sp-500-history-idUSKCN25E2R9}
4. _{https://finance.yahoo.com/lookup}
5. _{https://www.wsj.com/articles/fda-set-to-release-analyses-of-the-pfizer-biontech-covid-19-vaccine-11607423403}
6. _{https://www.pfizer.com/news/press-release/press-release-detail/pfizer-and-biontech-announce-vaccine-candidate-against}
7. _{https://www.cnbc.com/2020/12/08/uk-rolls-out-pfizer-coronavirus-vaccine-heres-what-you-need-to-know.html}
8. _{https://www.washingtonpost.com/opinions/2020/12/08/inflation-interest-rates-joe-biden/}
9. _{https://news.usc.edu/178979/business-closures-covid-19-pandemic-united-states-gdp-losses/}