Despite all the challenges of 2020, stocks and residential home prices reached all-time highs while mortgage rates settled at all-time lows. The 10-year treasury is still below 1.0%. From an investment view, 2020 was a good year. As much as we’d like to be optimistic because of the vaccine, there are some serious risks and head winds to continued growth.
We imagine you are as ready for 2021 as the rest of the world. Not wanting to be caught off guard, we are busy preparing our investment strategy for the new year. As such, we consider potential risks. We continue to believe that a diversified approach to investing has the best chance of reducing volatility during uncertain and unprecedented times. According to Charles Schwab’s Chief Global Investment Strategist, Jeffrey Kleintop, the five biggest global investment risks in 2021 are:
Problems with the vaccine rollout
Geopolitical and trade tensions not subsiding
Fiscal and/or monetary policy tightening
Zombie economy
Interest rate/dollar shock
Problems with the vaccine rollout
The market noted the good news about COVID-19 vaccines and expects a quicker economic recovery. If distribution, adoption, or effectiveness of the vaccine does not meet expectations, we could see a market drop. Kleintop worries that the market reacted too optimistically and hasn’t considered that the December holidays could increase infections. Another concern is the recent news about virus mutations.
Geopolitical and trade tensions do not subside
Kleintop believes that the current market pricing excludes any concerns about potential foreign policy tension. Any such tension could trigger another market drop. Kleintop highlighted the following situations:
Trade tariffs, environmental, labor, and intellectual property rights issues with China
Escalating tension between Australia and China
Potential for a new conservative hardline Iranian president
Brexit, German elections in 2021, and anticipation of France’s 2022 elections
North Korea, Russia/Syria, Venezuela, and other nations at odds with U.S. interests
Fiscal and/or monetary policy tightens
The market expects continued monetary easing. Any policies to the contrary could trigger a market drop.
Zombie economy
Economic recovery may take longer than expected in part because of “zombie” businesses. A zombie business is a business “with income insufficient to cover debt payments.” About one-fifth of U.S. and non-U.S. companies fall into that category. Government support kept businesses alive that would have gone bankrupt in 2020 even without the pandemic. This is a concern because these businesses may use their financial support to make debt payments instead of strengthening the economy.
Interest rate/dollar shock
Any unexpected surges in inflation or bond yields could cause a market drop. The same holds true for an unexpected drop of the dollar value.
Whatever 2021 will bring, we feel diversifying into non-corelated investments in the public and private space provides the best chance of reducing volatility during uncertain and unprecedented times. We hope you get to enjoy the holidays and look forward to the day when we can freely meet in person again.