As unpredictable as the markets are, there is always a long list of concerns investors keep their eyes on. This summer, these 4 risks could cause a significant market correction.
As unpredictable as the markets are, there is always a long list of concerns investors keep their eyes on. The beginning of 2014 has been a rollercoaster for equity markets, though they have seen gains so far. And while some investors are happy with any gains, others realize things could be so much worse.
Russ Koesterich, CFA, global chief investment strategist for BlackRock, wrote in the company’s blog about 4 market risks that could lead to a more severe market correction. He reminds investors that the market has yet to see a significant correction.
Koesterich has written in the past about market risks investors should be worried. A year ago it was the risk of a US slowdown, the risk of a crisis in the Middle East, the risk of a eurozone crisis flare-up, and the risk of an unknown external shock.
While he expects equities to move higher over the year and he recommends sticking with stocks, even though they are no longer cheap, he predicts 2014 will be a more difficult year for stocks. (Marc Lichtenfeld with InvestmentU stated earlier this month that the market could still rise by as much as 74% if we look at historic numbers of recent bull markets.)
Any of the following concerns “could quickly turn a difficult year into a bad one,” he writes.
Here are his 4 market risks for 2014:
4. US bond market
With interest rates at these levels, bond prices “can reverse violently and abruptly,” Koesterich writes. He points to 2 risks related to the bond market: a change in the Fed’s language and aggressive selling of bond funds by retail investors.
While investors pile into bond funds, that could change quickly with a subtle shift in the Fed’s tone. Many bond investors are scared because they know it’s only a matter of time before interest rates go up.
“A turn in rates could produce a quick turn in flows,” he writes.
Smart investors, though, know and understand their bond fund’s duration.
Koesterich believes that Chinese stocks may still make sense over the long run. However, he is expected a modest deceleration in the Chinese economy. The government is attempting to slow down the country’s real estate market and credit expansion without ruining its growth.
“A sharp and unexpected drop in growth would not only pose a risk to China, but with China as the world’s second largest economy, it would pose a risk to the global economy as well,” he writes.
Just as last year, Koesterich is wary about Europe even though its “former problem children” have all-time low bond yields. There are still risks, though. For instance, sovereign debt levels are still on the rise, growth is weak, and the currency zone is close to potential deflation.
It’s not just the economy, though. The political situation has not improved in Greece and the government is on a thin wire.
“The European parliamentary elections may illustrate just how much damage has been inflicted on the region’s main political parties,” he writes.
People are rightfully worried about the situation in Ukraine. There is really no way to know how the events will unfold, however. Right now, though, the market isn’t really being affected by what is going on there.
“An escalation in Ukraine-related violence and more sanctions against Russia don’t appear to be priced into financial markets and would both likely lead to increased selling,” Koesterich writes.