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These 4 World Events Could Kick Off a Market Crash in 2020

By Keith Noonan - Updated Jan 28, 2020 at 9:44AM

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Investors shouldn't be taking bull-market conditions for granted.

The U.S. stock market is enjoying its longest bull run in history. If it continues through to March, it would mark the 11th straight year that stocks have posted gains. Strong performance for the U.S. economy and an improved outlook on trade have helped push the market higher in recent months, but the market's run has also been fueled by record stock buybacks padding earnings, corporate tax cuts, and low interest rates from central banks -- and prudent investors understand that a crash is a matter of "when" and not "if."

Even with a recent pullback, major indexes are trading very close to record highs. But a range of economic factors, including relatively weak global growth and slowdown for corporate share repurchases, give cause for a more cautious outlook in 2020. In addition to economic trends that could spur a recession or market crash in the U.S., there are also four political factors and emergent events that could help tip the scale and put an end to the market's record bull run. Investors concerned about a crash hitting this year should monitor each of these four.

Three arrows pointing down and to the right, with one shattering the ground

Image source: Getty Images.

1. Continued spread of coronavirus

The faster-than-expected spread of the novel coronavirus has been the first event to seriously dampen market enthusiasm in 2020, and worst of the impact may be on the way. This never-before-encountered member of the coronavirus family is broadly thought to be more contagious and less deadly than the variant that caused the SARS (severe acute respiratory syndrome) outbreak in 2003.

The current coronavirus outbreak started in Wuhan, China. Already, the virus has infected thousands of people worldwide, with a rising death toll. Wuhan and 11 other Chinese cities are now in quarantine, and Chinese President Xi Jinping has warned that the spread of the virus is accelerating.

There are already early signs of coronavirus impacting business operations. Disney closed its Shanghai theme park on Jan. 25 as the spread of the virus accelerated, companies including McDonald's and Starbucks have shut down operations in cities near the epicenter of the outbreak, and the professional esports leagues for Tencent's League of Legends have been put on hold.

Instances of the virus were confirmed in Europe, Australia, and Southeast Asia following the China outbreak. The virus has also made it stateside, with the U.S. recently reporting a third confirmed case of the coronavirus. If the virus were to see a similar spread trajectory in areas outside of China, it's reasonable to expect that it would have corresponding impacts on consumer behavior, business operations, and overall market sentiment.

The market hates uncertainty, and continued acceleration of the coronavirus, without signs of significant progress in addressing its spread and treating affected individuals, could make investors very uneasy. Most analysts expect the impact from the virus on the stock market will be relatively brief, according to a report published on CNBC on Jan. 23, but the market could be on edge until the outlook on the situation improves.

2. Potential reignition of the U.S.-China trade war

The signing of the "phase one" trade agreement between the U.S. and China, which took place on Jan. 15, seems to bode well for the world's two largest economies. But investors run a serious risk by taking continued de-escalation in the trade war for granted.

The deal did establish a ban on forced technology transfer (which required U.S. companies operating in China to make their technologies available to the country's government), and create stricter protections for trade secrets and intellectual property -- at least on paper. China also made a concession to purchase an additional $200 billion in U.S.-made goods over the next two years, thereby reducing the overall trade deficit.

There seem to be many positive steps in the deal, but its key points will have to be carried out and enforced to be truly significant, and it wouldn't be shocking to see the trade situation take another turn for the worse in 2020. In fact, the enforcement provisions in the phase one deal appear to make it relatively easy for the current detente on trade to collapse.

Essentially, if Country A thinks that Country B has violated the agreement, it can enact tariffs proportional to the related damages incurred, without the expectation of retaliatory tariffs or other actions in reprisal. If Country B disagrees that the tariff increase has been conducted in "good faith," it can exit the trade agreement without consequence.

The American and Chinese flags.

Image source: Getty Images.

The phase one agreement represents welcome progress toward resolving trade tensions, but it looks closer to a temporary cease-fire than a peace treaty. Many analysts hold the position that the deal provides a near-term de-escalation, but leaves many of the biggest, fundamental issues of the trade war (including cybersecurity, remaining IP protection issues, and the role the Chinese government plays in major industries) unresolved.

President Trump seemingly has an added incentive to try to keep the deal on track -- the hope of bolstering his reelection chances -- but the deal might still fall apart. Richard Martin, managing director at IMA Asia, estimates that the phase one trade deal has just a 50% chance of lasting through the end of this year. He projects that it has just a 25% chance of lasting through 2021.

3. Rising instability in the Middle East

Just three days into 2020, the U.S. military carried out a drone strike on Iranian General Qasem Soleimani and nine other people in a two-car convoy at an airport in Baghdad, Iraq. The legality of the killing, which followed on the heels of protests and attacks at the U.S. embassy in Baghdad, has been questioned. Officials from the Trump administration said the strike was justified because Soleimani was connected to the embassy event and was plotting additional attacks on four U.S. embassies, but the act was without recent precedent and appears to have significantly elevated tensions with Iran.

The Iranian military responded to the Soleimani killing by launching a missile strike on an Iraqi military base, and while no U.S. troops were killed in the strike and a de-escalation appeared to follow, it has since been reported that 34 service members suffered brain injuries as a result of the strike. In addition to the long-running war in Afghanistan and a potentially volatile situation in Syria, rising tensions in Iraq and a deteriorating relationship with Iran suggest that the Middle East remains a hotbed for scenarios that could disrupt global markets.

A potential military escalation in the region wouldn't necessarily mean tough times for stocks. The market has actually posted significant expansion during some wars and otherwise heightened periods of military activity. However, it bears repeating that the market hates uncertainty, and the situation in the Middle East has become more volatile than it was a year ago. The market shrugged off the escalation following the Soleimani killing, and tensions have since receded somewhat, but the situation appears far from resolved.

If these dynamics sound complex and convoluted, it's probably because they are -- and this presentation of the chain of events barely scratches the surface. The short version is that there are a lot of fraught dynamics at play in the international-relations sphere at present, and a range of potential flash points that could worry investors and prompt them to take a more bearish near-term outlook.

4. A contentious U.S. presidential election and political climate

The 2020 U.S. presidential election is heating up, and the only safe bet at this point is that it will likely be hard-fought and bitterly contentious. Operating under the premise that the Republican-controlled Senate will likely decline to convict President Donald Trump in the impeachment trial, the market has shown little concern for the potential disruption that might result if the sitting U.S. president were removed from office. However, investor confidence may be shaken as the political climate becomes increasingly tumultuous heading into election season -- and one candidate in particular might prove particularly disruptive.

The White House, seen from street level at night

Image source: Getty Images.

While it's possible that former New York City Mayor Michael Bloomberg or Senator Elizabeth Warren of Massachusetts could make an unexpected surge, it looks like the Democratic primary will come down to a contest between former Vice President Joe Biden and Senator Bernie Sanders of Vermont. Of the two front-runners, Biden is the candidate more likely to put markets at ease -- and he stands as the current leader in most national polls. On the other hand, Sanders has a feasible path to winning the nomination, appears to have momentum on his side, and has recently taken the lead on some sites that allow betting on the U.S. presidential election.

Sanders actually topped Biden in CNN's most recent national poll, coming in as the top choice for 27% of respondents, compared to 24% for the former VP. Wall Street previously bristled at the prospect of Elizabeth Warren emerging as a likely front-runner, and the market may have an even more pronounced reaction to Sanders securing the Democratic nomination -- or the presidency.

The Vermont Senator has called for a complete rollback of the Trump tax cuts that played a big role in the market's rally over the last few years. Sanders has also stated that he would look to increase taxes on Wall Street transactions in order to fund student-loan forgiveness, and move to break up large conglomerates -- specifically naming Disney, Comcast, Verizon, and AT&T as potential targets. Among other proposals that could rightly be expected to reduce investor confidence, Sanders has also proposed an increase on capital gains taxes, an annual tax on Americans with a household net worth above $32 million, and a ban on stock buybacks.

Hedge fund manager Stanley Druckenmiller said in June that a Sanders presidency could result in stock prices declining between 30% and 40% from their valuations at that point, and some analysts have claimed there could be an even bigger crash. Candidates like Biden and Trump are generally viewed as being much more favorable to business, but it's unlikely that a 2020 victory for either the former VP or the current president will do much to assuage the country's increasingly polarized political climate.

No matter who wins the election on Nov. 3, roughly half the country is going to be very dissatisfied. That, in and of itself, might not be enough to trigger a market crash, but the election results and general political climate could be a significant contributing factor -- particularly if economic numbers start coming in weaker than expected.

What do these risks mean for investors?

History has shown that timing the market and predicting crashes is an incredibly difficult task, and most people are best served by staying in the market instead of trying to predict its ups and downs. At the same time, it's fair to say that investors have already enjoyed a tremendous rally over the last 10-plus years, and it may be sensible to reorient your portfolio to prepare for less favorable conditions. You may also want to keep some cash on the sidelines, in case a market correction presents opportunities to build positions in high-quality businesses at substantially reduced prices.

Investors looking to minimize their risk profiles may want to reduce positions in growth-dependent holdings, in favor of high-quality defensive stocks that pay strong dividends and are backed by sturdy businesses. When it comes to buying and holding growth stocks, investors may want to avoid more speculative plays and concentrate on high-quality companies with proven track records, and strengths that set up a path to long-term success. It's possible that the record bull market could be years away from ending, but investors should survey the field, keep realistic goals in mind, and then chart an informed path forward.

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