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5 Global Risks That Could Hammer Stocks in

2019
BY MARK KOLAKOWSKI

Updated Jun 25, 2019


Stocks are soaring and forecasts of global economic growth have gotten
increasingly upbeat, but a number of key political risks are on the horizon,
Barron's reports. Against a background of historically high equity valuations and
low interest rates, just a small dose of bad news can send stocks and bonds
plummeting.

Ian Bremmer, the founder and president of Eurasia Group, the oldest and largest
consulting firm devoted to advising investors and business leaders on the impact
of political risks around the world, shared his chief concerns with Barron's. They
include these five, which he believes are being underestimated by investors: a
major cyberattack, war with North Korea, President Trump blows up NAFTA, a
new crisis erupts in the Middle East, and China's influence grows. "Geopolitics is
very negative today," Bremmer tells Barron's. (For more, see also: 5 Market
Predictions for 2018: Vanguard's Bogle.)

1. Major Cyberattack
The securities markets are "underestimating the likelihood of a major cyberattack
against the critical infrastructure of a major country," Bremmer says. This risk is
increasing, he believes, but investors aren't pricing it in. He finds this to be a
more likely scenario than the breakout of an actual shooting war with North
Korea.

2. War With North Korea


Bremmer gives very low odds to a preemptive military strike against North Korea
by the U.S. The real risk, in his opinion, is that a series of mistakes and
miscalculations by either side will escalate into war. Any attempt to remove North
Korean dictator Kim Jong-Un from power is bound to provoke a
massive conventional response against South Korea, never mind a nuclear
attack, he says. While Kim Jong-Un "isn't suicidal," he has been effective
at demonstrating that "North Korea's deterrence is real and unstoppable," per
Bremmer. "People around Trump understand that," he adds.

3. Trump Blows Up NAFTA


"NAFTA should be modernized, and the Mexicans agree with that,"
Bremmer indicates. However, he continues, "Trump is not helping countries help
us." Specifically, 2018 is a federal election year in Mexico, with its presidency
among those offices up for a vote in July, and thus the political climate is not ripe
for making heavy concessions to the U.S. on NAFTA. If Trump is too
intransigent, and talks break down, that would be very damaging for Mexico, and
may help vault a leftist candidate to its presidency, creating yet more problems
for both countries, Bremmer adds.

4. Middle East Crisis Erupts


Iran is not getting as much foreign investment as they expected from the deal
with the Obama administration to curtail their nuclear program. Meanwhile,
Trump looks to impose sanctions aimed at punishing Iran for supporting
terrorism. If hardliners respond by restarting nuclear weapons development,
Bremmer fears that the odds of a military strike by Israel will increase.
Meanwhile, he thinks that Saudi Arabia "is on borrowed time" and that the
"massive reforms" proposed by their "impressive" new leader, Crown Prince
Mohammed bin Salman, may not keep the lid on this potential powder keg. (For
more, see also: Stock Market's 'Absurdly Good' Returns Will Worsen in 2018.)

5. China Gains More Clout


Trump's decision to exit the Trans-Pacific Partnership has given China another
opportunity to increase its global economic and political clout, which already
have been growing. Bremmer considers Xi Jinping to be by far the strongest
Chinese leader since Mao, while the U.S. is considered by many around the
world to be a "weak and inconsistent" leader. China also is buying influence
around the world by "writing big checks," he adds. Also, China's political system
allows it to be a leader in the implementation of labor-saving technologies, while
also maintaining widespread labor inefficiencies in the pursuit of high
employment and social stability, things the U.S. government cannot do,
Bremmer notes.

'Susceptible to Any Shocks'


The World Bank recently raised its forecast of global economic growth, while
warning that such a rosy outlook means that the preponderance of risks are on
the downside, Bloomberg reports. In 2017, worldwide GDP expanded by roughly
3%, the best pace since 2011, per both sources, with 3.1% growth now
forecasted for 2018.

Meanwhile, technical analyst Michael Kahn sees the most overbought conditions
in the S&P 500 Index (SPX) since at least the 1970s, per his column in Barron's.
While this does not preclude further gains in 2018, sending stocks into even
more overbought territory, "it does mean that the market is susceptible to any
shocks from within or without," he warns.

Resilient Markets
Nonetheless, according to research by LPL Financial, "the stock market tends to
be resilient to crises, and the market's reaction is greatly impacted by where the
economy is in the business cycle." Thus, "the biggest declines tend to be
associated with economic weakness."

Based on their analysis of crises since 1950, and using the Dow Jones Industrial
Average (DJIA) as a barometer of the U.S. stock market, they found that the
initial reactions tended to be negative, with a median first day drop of 2.3%, but a
median 5% rise after 22 days. The big stock market declines associated with the
Arab Oil Embargo of 1973, President Nixon's resignation in 1974, the Hunt
Brothers silver crash of 1980, Iraq's invasion of Kuwait in 1990, 9/11 in 2001, and
the collapse of Lehman Brothers in 2008 all were in or around recessionary
periods, per LPL.

Watching for Signs


Like a contraction and recession, investors and economists are also always
watching for signs of an economic collapse. Through the first quarter of 2019, the
United States experienced a 10-year bull market that continues to keep
extending. Through February 2019, the S&P 500 index was up 313% from its
lowest point in March 2009. While it continues to gain, economists and the media
put out regular reports on warnings signs that could lead to a contraction or
collapse. In the U.S. there are several changes taking place that speculators are
watching, including effects from the new corporate tax cuts and Tax Cuts and
Jobs Act, new trade agreements in North America and China, and the U.K.’s
pending exit from the European Union.

Other noteworthy headlines have identified risks in unmatched long-term


liabilities, a resurgence of problems in the real estate market, the U.S.’s budget
and deficit management, missteps in monetary policy, rising debt to GDP ratios
in the U.S. and globally, and the ongoing risk of too big to fail institutions and
their mounting debt. For those investors closely watching these risks or
concerned about the global view, the International Monetary Fund and World
Bank are two of the best global sources, with the IMF publishing the World
Economic Outlook and Global Financial Stability reports regularly.

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