The 2020 picture looks drawn from a scary movie and despite that, stock markets around the world had managed to rally, mainly stimulated by unprecedented actions from central banks. We’ve already talked about the top reasons why markets continue to rally, but since valuations had reached dangerous levels again, it would be appropriate to analyze some of the reasons why the sentiment would deteriorate and selling will resume on a large scale.
#1 Resurgence of COVID-19 cases
As countries where the number of new cases had stabilized start to open up, the risks of a new surge in infections should not be excluded. From a historical point of view, pandemics come in cycles and that’s been the case with the last recorded pandemic – the 1918 Spanish Flu. It killed approximately 50 million people all around the world during three waves of infections, with the second one being the most deadly. However, COVID-19 does not seem to be so severe in terms of mortality, but it remains a highly contagious virus.
#2 Lower growth prospects
In case the first point will occur (infections will spike again), this could lead to countries implementing strict control measures again. That will dampen the growth prospects for 2021 and could lead to asset repricing. Right now, stock markets are betting on a V-shaped recovery, a scenario which seems to be unlikely, even if the spread of the virus will be under control for the rest of the year. Record-breaking unemployment levels and a massive drop in consumption are just two of the main drags for economic activity. These won’t be solved overnight and more stimulus from governments will be needed to prevent permanent economic damage.
#3 Bankruptcies in the private sector
Trading when the economy turns south is very tricky, given risks could arise at any point. One of the topics that are less discussed nowadays is the risk of big bankruptcies all around the world. The banking sector as well as corporations will be under heavy pressure in the months ahead. We must keep in mind that central banks can only provide liquidity if companies remain solvent. Unfortunately, not all companies will manage to survive, with names like JC Penny and Hertz already filing for bankruptcy. What would be concerning though, is a collapse of a major bank. In 2019, names like Santander, Soft Bank, and Deutsche Bank were already having trouble. How they’ll manage to navigate this year is still a heavy question.