There are no shortage of commentators predicting a healthy 2021 for ASX markets and the global economy. The S&P/ASX 200 Index (ASX: XJO) has just emerged from one of its best months in history.
December is proving to be a good month so far as well, given the ASX 200 is already up around 3.2% since the start of the month. In fact, as of today (at the time of writing anyway), the ASX 200 is now also in the green year to date, and up almost 48% from the lows of 23 March.
My Fool colleague Brendon Lau covered some of the reasons commentators are bullish on 2021 this morning, which you can (and should) look at. These include a bullish outlook for cyclical shares (such as banks) due to an expected global rollout of coronavirus vaccines, as well as strong economic growth overall.
But I'm here to take the punchbowl away from the party as it were.
We all hope for a great year in 2021, don't get me wrong. But let's look at some reasons why 2021 might not go as planned on that front.
ASX in frothy territory?
According to reporting in the Australian Financial Review (AFR) this week, Liz Ann Sonders, chief investment officer at the giant US broker Charles Schwab, says that investors need to be wary in 2021:
The success of the market this year has bred what I believe is its most significant risk at present — elevated optimistic sentiment… that nearly all behavioural and attitudinal measures of sentiment show at best complacency, and at worst speculative froth. There have been a myriad of comparisons between today's markets and the 2000 tech bubble era; but perhaps a better comparison would be to 2009-2010 as we look ahead to 2021.
Ms. Sonders points out that it took a "brutal" 17-month bear market back in 2008-09 before the market finally found a bottom. By comparison, the 'coronavirus crash' that 2020 saw early in the year lasted just over a month. That doesn't sit well with Ms. Sonders, who states that corrections (sometimes heavy) often come after periods of market exuberance.
Keep an eye on monetary policy
Separate reporting in the AFR today outlines some additional risks for 2021. This report posits that the largest risks facing the market next year come from (in ascending order of likelihood) monetary policy reversal (rising global interest rates), a "market accident" due to excessive risk taking, and mounting corporate bankruptcies.
This report notes that "while investors will continue to surf a highly profitable liquidity wave for now, things are likely to get trickier as we get further into 2021". It also states that, "central banks' deepening distortion of markets will be harder to defend in a recovering economy amid rising inflationary expectations". It concludes by telling investors who want to navigate through these uncharted waters, they need "a willingness to re-examine some conventional wisdom" when it comes to investing. Not an easy ask!
Foolish takeaway
We all want a prosperous 2021. But what we want and what the share market delivers are, of course, very different things. Judging by what these commentators are saying, we should all keep a very close eye on monetary policy next year.
