17 February 2021 /
Our thinking
Three bull and bear cases for markets
Nikolaj Schmidt
Chief International Economist

Since the US elections, asset prices have risen steadily higher. Can the risk rally continue? I believe it can as it is underpinned by three powerful drivers. However, there are also three looming risks that could undermine it.

Three primary drivers of the rally

Refocus on the business cycle

It is tempting to attribute the rally to the outcome of the US elections. Personally, I think it has had less to do with the results of the elections than the mere fact that they have occurred, leaving the markets with one less thing to worry about. Leading up to the elections, investors had become so preoccupied with how different combinations of government would affect markets that they failed to notice that we are likely in the early stages of the next business cycle expansion.

Business cycle expansions are measured in years rather than months, and equities and credit tend to perform as the expansion unfolds. The passing of the elections left investors in search of a new narrative and, aided by good results from the vaccine manufacturers, their focus fell on the business cycle—and I believe this has been one of the drivers of the risk rally.

“…the next fiscal package should be…the closest we will ever come to helicopter money…”

US stimulus measures

The second driver has been the prospect of major stimulus in the US Last year, the Federal Reserve adopted a “flexible form of average inflation targeting” that will enable it to keep monetary policy loose until there is a substantial improvement in the performance of the economy. Accordingly, given the ongoing challenges posed by the coronavirus, we believe there is little risk of policymakers even talking about tightening monetary policy until the second half of the year. Combined with the outcome of the Georgia senate election (which gave the Democrats control of Congress, making it easier for President Joe Biden to drive through major spending plans), the outlook for fiscal support has improved significantly.

Throughout 2020, the US Treasury significantly raised the amount of cash it holds on its account at the Fed. In effect, this meant that the Fed was implementing quantitative easing while the US Treasury engaged in quantitative tightening. We see significant scope for the US Treasury to reduce its cash holdings at the Fed in order to finance the next spending package, and amid the winter wave of the coronavirus, we do not think the Fed will take any steps to sterilize this operation. In effect, the implementation of the next fiscal package should be fiscal expansion along with quantitative easing—the closest we will ever come to helicopter money (or modern monetary theory).

Vaccine rollout

The last driver of asset prices has been the vaccine rollout. Investors live in the hope that by June we will—at long last—glimpse the coronavirus pandemic in the rearview mirror. Should we be so lucky, this would reduce uncertainty, set free the household animal spirits, and with that create an economic boom.

“…there is a risk that we will not be able to put the coronavirus behind us in 2021.”

Three key risks that warrant investor caution

Although the three drivers described above provide a strong foundation for risky assets, there are three lurking risks that should make us cautious.

Inflation pressures could build

First, the Biden administration’s planned fiscal expansion is extraordinarily large by any historical standard, and a big portion of the stimulus appears slated to filter through to the real economy in the late spring—exactly the time when we expect an organic bounce as coronavirus seasonality allows policymakers to roll back mobility restrictions. Could this lead to a rapid buildup of inflation and financial stability pressures, bringing forward monetary policy tightening? It’s possible, but I believe that the Fed will first pause and consider whether any increase in prices is a temporary bounce related to bottlenecks as the economy reopens, or genuine inflationary pressure from an economy that operates at full capacity. In any case, when central banks accommodate anything but very temporary inflation pressures, the currency tends to depreciate. This does not bode well for the dollar—a prime gauge of risk appetite.

Vaccines may not be the panacea

The second major risk relates to the efficacy of the vaccines. On this front, the recent news flow has not been encouraging. There have been multiple mutations of the original coronavirus strain, prompting doubts over the efficacy of the current vaccines. Given that the virus will continue to mutate, there is a risk that we will not be able to put the coronavirus behind us in 2021. In my view, given the rapid buildup of long risk positions in the market, the exceedingly loose fiscal and monetary policy is unlikely to paper over cracks that originate from inefficacy of vaccines due to mutations of the virus. Indeed, should the need for additional fiscal support come to pass, the market likely will challenge the sustainability of the fiscal position of at least a few sovereigns in the emerging markets.

China’s stimulus measures may not persist

Our third concern is China. The Chinese economy has staged a spectacular rebound from the coronavirus recession, and we have reached the point where policy stimulus is being rolled back. China is the world’s second‑largest economy by GDP and easily the largest economy if measured by real resource absorption. On the economic side, one of the key focuses of the decision‑makers is to gradually bring the country back onto the deleveraging path to reduce any financial risks that, should they be mismanaged, could present challenges to the incumbent leadership. The authorities have indicated that they will be cautious to ensure that the tightening happens at a measured pace, but given the combination of the change in the credit impulse and historical track record of stop‑go policies, we keep a keen eye fixed on China to make sure that indeed the pace of policy tightening is at a measured pace. 

“…the path of least resistance is…for prices to continue rising.”

An extension of the rally is the most likely outcome

Risk markets have rallied a long way, and rallies come with inflated valuations and a buildup in investor positioning. Overall, however, I believe the drivers of asset prices outweigh the risks and that the path of least resistance is therefore for prices to continue rising. And although it is possible that such a buildup of risk positions will lead to a rapid price adjustment, I would be inclined to see a price correction—provided it is not accompanied by a worsening of one of the risk factors described previously—as an opportunity rather than a sign of something worse to come.

ID0003925 (02/2021)


Sign up for Global Equity insights from T. Rowe Price
Share this article:
Share on linkedin
Share on email

Important Information

The specific securities identified and described are for informational purposes only and do not represent recommendations.

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. 

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction. 

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price. 

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.

EEA ex-UK–Unless indicated otherwise this material is issued and approved by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier. For Professional Clients only.

Switzerland–Issued in Switzerland by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland. For Qualified Investors only.

© 2021 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

Our thinking

Weekly market recap

Read Time: 10 mins Yoram …

Our thinking

The cycle – where are we? Implications for global equity investors

Read Time: 5 mins David …

Global Market Outlook

Gains still to be found in Chinese equities

Read Time: 6 mins Wenli …

Our global equity capabilities

Explore our range of strategies available to

you and your clients

Thank you for registering for global equities updates. The latest insights will be sent straight to your inbox, in the meantime see our latest thinking:

Important Legal Information

This site is intended for investment professionals. I have read, understood, and agreed to the terms and conditions detailed below and confirm that I am either an investment professional within the EEA or qualified investor within the meaning of Swiss collective investment schemes law with domicile in Switzerland, and that I will not pass on any information on this website or downloaded from this website to third parties.

Important Legal Information

By accessing this website, you consent to T. Rowe Price collecting information by way of cookies. To find out more please read our cookie policy.

Information contained in the T. Rowe Price website is not intended for investors in any jurisdiction in which distribution or purchase is not authorised, including the jurisdiction of the reader of this information, where applicable. For example, the information herein is not for distribution to and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States of America to or for the benefit of United States persons.

Information obtained from this site is intended specifically for the individuals who have agreed to these terms and conditions and may not be redistributed without prior consent from the T. Rowe Price Legal department.

The information on this website has been prepared for information purposes only and does neither constitute investment advice or other advertisement or recommendation nor an offer or solicitation to purchase or sell investment instruments, to effect any transaction or to enter into any legal relations. The investment instruments described may not be available to or suitable for all investors. You should consider, if appropriate, obtaining independent professional advice before making an investment decision and be aware of local laws governing investments.


The information is designed for professional investors, including financial intermediaries or members of the media, and is published for informational purposes only. In particular, the information is directed at only informing persons falling within one or more of the following categories:

(a) A government;

(b) A bank or insurance company;

(c) A pension fund or charity;

(d) Persons whose ordinary activities involve them, as principal or as agent, in acquiring, holding, managing or disposing of investments for the purposes of a business carried on by them or whom it is reasonable to expect will, acquire, manage or dispose of investments for the purpose of such a business;

(e) Persons whose ordinary business involves the giving of advice, which may lead to another person
acquiring or disposing of an investment or refraining from so doing;

(f) Representatives of the media for corporate and background information about T. Rowe Price.

Persons who do not fall into one of the above categories should not act upon the information contained herein.

Unless otherwise noted, the content appearing in this Section of the T. Rowe Price website has been issued by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier.

For Switzerland

This website contains advertising.

The information in the T. Rowe Price website is exclusively directed at qualified investors within the meaning of the Federal Act on Collective Investment Schemes (‘CISA’) and its implementing ordinance as well as according to the most recent interpretation of the Swiss Financial Market Supervisory Authority FINMA with domicile in Switzerland.

In particular the following are considered qualified investors within the meaning of CISA: supervised financial intermediaries (e.g. banks, securities dealers, fund management companies), supervised insurance institutions, public entities and pension schemes with professional treasury management, enterprises with professional treasury management, high net worth individuals who have elected in writing to be deemed qualified investors and independent asset managers who have declared in writing that they will be using the information herein only for clients that are qualified investors.

Issued by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland.