Large-scale COVID-19 vaccination, economic recovery, and business growth may not be enough to appease investors, Bank of America said.
The Bank's Research Investment Committee expects economic growth to resume in 2021, as vaccinations allow for more thorough and faster revaccinations. However, the team is less inclined to be less optimistic about market returns, predicting "modest" growth in the new year driven by risky assets and broad indices.
The US could lag behind the rest of the world and only fully return to long-term growth in 2022, the bank said, adding that such a disappointing outlook makes the team “suspicious of an increasingly turbulent market.”
First, hopes for a vaccine recently pushed the bank to the highest level of optimism on Wall Street since the financial crisis. The indicator is now at 57.8%, just 2.7 pips from sending a sell signal to investors. The record high inflow of $ 14 billion in ETFs from growth funds in recent weeks further exposes the overwhelming bullish sentiment among investors.
Bank of America expects global GDP to grow 5.4% next year, while the US economy grows 4.5%. The S&P 500 will rise about 5% to 3,800, and the 10-year Treasury yield will rise to 1.5%, the firm said in a forecast.
While bad news is good news, the bank's strategists say. The skyrocketing COVID-19 rate and weakening economic data are putting more pressure on Congress to adopt a large stimulus package. That narrative will change next year, when vaccine distribution, stimulus rollouts, and market rallies could force lawmakers to tighten fiscal conditions and focus on debt repayment.
History does not set precedents for such a rapid economic recovery, but the trends observed in 2011 may provide some indication of how the markets will develop in 2021. Coming out of the financial crisis, stocks rose 8% in the first half of 2011 before the reality of a slowdown in secular trends and austerity in government turned into optimism.
"This dynamic of 'broken hopes' may reappear next year," the bank said.
A handful of potential opportunities could lead to further market volatility, according to the team. Rising defaults in China could reverse the country's rapid recovery and plunge its economy into yet another recession. Bailouts of heavily indebted US companies could limit productivity, and long-term work-from-home orders could limit inflation.
Nuclear decision-making and policy-driven industrial growth can also change the bank's outlook.