Key Points

  • Risk is often the result of a very high degree of confidence among market participants in one specific outcome.

  • The top five global risks for investors in 2021 are all surprises to the consensus view: problems with the vaccine rollout, geopolitical and trade tensions do not subside, fiscal and/or monetary policy tightens, a “zombie” economy, and interest rate/dollar shock.

  • Having a well-balanced, diversified portfolio and being prepared with a plan in the event of an unexpected outcome are keys to successful investing.

After a powerful rally for stocks for much of 2020, let’s take a look at the biggest potential downside risks for investors in the year ahead. While none of these scenarios make our base case for 2021, a review of the top investment risks in greater depth may be prudent as we enter the New Year.

Hiding in plain sight

History shows us that the biggest risks in a typical year aren’t usually from out of left field (although that sometimes happens, as it did in 2020 with the COVID-19 outbreak). Rather, they are often hiding in plain sight. As goes one of my favorite quotes attributed to Mark Twain: “It ain’t what you don’t know that gets you in trouble, it’s what you know for sure that just ain’t so.” Risk appears when there is a very high degree of confidence among market participants in a specific outcome that doesn’t pan out. So, by identifying the unexpected, here are the top five downside global risks for investors in 2021, in no particular order:

  1. Problems with the vaccine rollout
  2. Geopolitical and trade tensions do not fade
  3. Fiscal and/or monetary policy tightening
  4. A zombie economy
  5. Interest rate/dollar shock

Diving into the big five

1. Problems with the 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. November’s good news on Phase 3 vaccine trials contributed to the strongest month for global equities in over 45 years as markets priced in a more rapid timeline for economic recovery. 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. Bottlenecks with virus testing capacity and turnaround times in both the U.K. and U.S. raise concerns about the ability to roll out widespread vaccination, an even larger operation. Also, we believe the market has not yet discounted the potential return to lockdowns in early 2021 should December holidays result in new waves of cases and hospitalizations, or the potential for the virus to mutate and render current versions of the vaccine less effective.

Vaccine news powered November and December gains

Source: Charles Schwab, Bloomberg data as of 12/18/2020. Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. Past performance is no guarantee of future results.