4. Washington Gridlock Around Mid-Term Elections
If there is one way to bring up your blood pressure, targeting politics is probably an easy way. Much of the bull market continuation in 2017 was due to lower regulations, the promise of tax reform and a pro-business attitude that frankly just wasn’t as present since the Great Recession. But now we have mid-term elections coming in 2018, and that throws the balance of power up for grabs afterward.
What if the ability to get any new laws passed suddenly dries up? What if all the lower regulatory efforts and pro-business efforts all get crammed into 2018 as an “as good as it gets” year? If the stock market is truly a discounting mechanism that tries to price in events for a few months to a year ahead, then this would be a real and serious risk for 2018.
5. M&A Roadblocks
The stock market loves mergers. After all, this is intended to make stronger companies and to reward shareholders. But despite the pro-business climate of the current administration, there has been some serious slowing of what sort of mergers will really be allowed in the future. There have been over $1 trillion worth of mergers and acquisitions that have been or could be at risk. They did not even allow Staples to acquire Office Depot, and even the outright acquisition of Rite Aid was blocked. Now we have pending mergers of AT&T and Time Warner, Qualcomm and Broadcom, CVS and Aetna, and whole slew of potential mergers that are under review or that could easily face scrutiny.
6. Increased Volatility … Finally?
It’s pretty boring to talk about the Volatility Index, but the market’s raging bull characteristics and a lack of sell-offs has sent the so-called VIX down to extremely low levels. The VIX has even been close to 10 (and been under 10) for weeks. Any January selling pressure could rekindle that volatility, and rising volatility means less certainty for investors and traders. A rise back to 15 would not be out of the question, but what happens when you get closer to 20 again? Theoretically it has to get back up there at some time.
Extreme VIX spikes higher have historically represented great buying opportunities, but they are scary and the average retail investors often get spooked out of the market during panics rather than using them as a chance to buy stocks on the cheap.
We already know that Washington, D.C., is a risk, but it’s a big world and there are many facets to geopolitical risks. Any one of the risks would spook the stock market. There is the ongoing probe over Russian meddling in U.S. elections. There are constant headlines still talking about a Trump impeachment. The threat of North Korea building nuclear weapons, the threat of Iran being back in the hot seat, Middle East turmoil, ISIS and terrorism can create a serious shock.
The reality is that geopolitics is always considered “tail-risk” in the markets, and it makes sense. That being said, these are the same risks over and over, and when they are not, you can just remove one name and insert the other risk flavor of the day.
8. Hacks and Glitches
There has not really been that much concern about a stock market hack, but there are always some trading glitches. With the rise of roboadvisors, algorithm and machine trading, and the dominance of exchange traded funds (ETFs), there could be all sorts of cascading worries. The market has trading curbs and speed bumps to trigger halts and the like, but it is very possible that if the public decides it wants out of the market all in a short time, then it would create one major bumpy ride.
And on the hack front, an argument can be made that the rising price of bitcoin and cryptocurrencies is partially fueled by buyers acquiring faceless currency if they get hacked. Some of us still worry that management of a major bank could wake up only to find that some (or many) of their accounts have been hacked and the cash is just gone one day. These remain tail risks, but they are risks.