The Top 5 Economic Risks of 2021
The Top 5 Economic Risks Going Into 2021
Excessive Valuations
The determination of a company being overvalued or undervalued can generally be determined by looking at the P/E Ratio. That is the ratio of the current share price over current earnings or net profit. The average PE ratio of the S&P 500 is typically around 16x. The current PE ratio is at 37x, more than DOUBLE the average. One of two things have to occur to justify a high valuation, either earnings have to rise or prices will have to fall. Faster earnings growth is expected outside of the US.
Source: Charles Schwab, Factset data as of 11/16/2020.
Slowing Economic Growth for the US
After years of economic and earnings growth in the United States exceeding the rest of the world, this is expected to change in 2021. The blue chart shows the most recent forecast for GDP for each country from the World Economic Outlook published by the IMF in October 2020. Selective lockdowns in some states are being implemented as case counts climb a second time and health care systems risk becoming overwhelmed. Increased or extended shutdowns in the first and second quarters of 2021 after the holiday season in December will pose a threat to extending economic growth in 2021, accounting for vaccine rollout to the general population in the second half of 2021.
Source: Charles Schwab, IMF WEO as of October 2020.
Artificial Zombie Companies
About one-fifth of U.S. and non-U.S. companies are considered "zombies," defined as those with income insufficient to cover debt payments. Crisis aid has kept business bankruptcies well below normal levels, meaning companies that would have died off naturally without the pandemic have been kept artificially alive. These companies may use aid to make debt payments rather than fuel economic growth through hiring or spending on equipment. There are many retail brands and companies that fall into this category.
US China Relations
U.S. President-elect Biden has made it clear he won’t be easing trade tariffs immediately and intends to confront China on environmental and labor issues in addition to intellectual property rights. China may respond by alerting other countries that new alliances with the incoming Biden Administration against China might prompt retaliation. China will look to surpass the US in GDP numbers within just the next few years together with their new trade agreement with other Eastern Asian countries.
Vaccine Rollout
The market has high hopes for a successful and on schedule rollout of the COVID-19 vaccines globally, anticipating a majority of people having been immunized by July for major countries like the United States and United Kingdom. There is potential for the stock market to pullback some of those gains if vaccine distribution, adoption, or efficacy lags, resulting in delays to the recovery timeline. It is also possible the market has not yet discounted the potential return to lockdowns in early 2021 if the December holidays result in new waves of cases and hospitalizations. What has yet to be seen is the effects of the virus mutating which could potentially render them less effective.
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