Market Insider

The seven stumbling blocks that could trip up the stock market

Dow nears 20K

A number of events, analysts say, could quickly trip up the post-election surge in U.S. stocks.

"It's clear the market is willing to give President-elect Donald Trump the benefit of the doubt right now," said Quincy Krosby, market strategist at Prudential Financial.

"The market is wading through all the negatives of his campaign, and (economic growth) is what we are focused on," she said. "But if history is any guide, the honeymoon always ends."

Here are seven possible events that could give investors pause:

1. Disappointment in Trump

The first test will likely come in January, when Trump is inaugurated as president and investors look for the government to follow through on promised tax cuts, infrastructure spending and deregulation. Hopes for those policies have spurred both the large-cap and small-cap indexes to record highs in the last few weeks.

"On some level, investors are flying a little blind … We are in many cases speculating about the details," said Ron Temple, co-head of multi asset and head of U.S. equity at Lazard Asset Management.

It's "reasonable to expect a bit of a pause as people realize we do not know the details of the tax plan," Temple said, adding that he is generally optimistic on the backdrop for stocks.

Republicans will have control of both chambers of Congress as Trump begins his presidency, raising hopes that his proposals will be enacted.

2. A loss of momentum

As stocks have unrelentingly pushed higher since the election, traders have pointed to support from positive momentum in one of the best months of the year for stocks. A concern would be if an event triggers a turnaround in sentiment, especially as confidence has climbed to multi-month highs.

"Confidence is very, very short lived … If something occurs in the next couple months, we could see confidence wane quickly," said Lance Roberts, chief investment strategist at advisory firm Clarity Financial.

The University of Michigan's consumer sentiment index leaped past expectations Friday to its highest since January 2015. Citi's U.S. economic surprise index has also been on the rise since late October.

Source: Citi

"I do believe President-elect Trump's goal is to grow out the economy," Temple said. "Unfortunately the approach of negotiating via Twitter is somewhat the opposite of that tactic ... I do worry that governing by Twitter is problematic, a sub-optimal approach to governing and (inspiring) confidence."

Since the election, Trump has used Twitter to attack companies such as Lockheed Martin and to take a tough line on U.S. relations with China.

3. Sluggish earnings

When companies begin reporting fourth-quarter results in the middle of January, their tone could also give markets a reality check.

"There could be some disappointment in the fourth quarter results relative to the current outlook," said Brett Reiner, co-portfolio manager of the Neuberger Berman Genesis Fund, which focuses on small-cap stocks. Reiner added that management would likely discuss a more moderate business environment than markets seem to be expecting.

But corporate earnings appear to be turning around. In the third quarter, the S&P 500 ended four straight quarters of earnings-per-share declines. Earnings-per-share are expected to rise 4.28 percent in the fourth quarter, to net zero annual growth for all of 2016, according to S&P Global Market Intelligence.

They're expected to rise 11.87 percent in 2017, and slow to 8.01 percent growth in 2018, S&P said.

Meanwhile, economists generally see the U.S. growing less than 3 percent in each of the next two years.

"We've yet to accumulate enough tangible evidence we can finally believe in the market expectation of significantly stronger growth in 2017," said John Lonski, chief economist at Moody's.

4. Rising yields

On the flip side, faster than expected growth in some areas could lead to inflation and higher yields, a negative for stocks.

A major factor in the stock market's gains has been stocks' relative attractiveness to very low-yielding Treasurys. However, as yields climb on rising expectations of economic growth and interest rate increases from Federal Reserve, stocks may become less attractive.

Over a 12- to 24-month period, "you're looking at an improving situation for corporate profits," said John Jares, senior portfolio manager of equity investments at USAA.

"The big thing you have to look out for is inflation," he said. "What will ultimately land this bull market is inflation, and the Fed will be forced to act."

5. A rising dollar

Following the election, the U.S. dollar index jumped to its highest in more than a decade, raising concerns for U.S. firms that sell products overseas.

Companies often blamed the strong greenback for poor earnings of the last few quarters. A stronger dollar also makes it more expensive for many emerging market countries to pay back dollar-denominated debt.

"The prices of oil, metals have been rising. It may well be at the start of the new year these base metal prices begin to sink as worries mount" for emerging markets with large amounts of dollar-denominated debt, Lonski said.

6. A slide in oil prices

Stocks could also come under pressure from another pullback in oil prices.

"I think we see much more of a correlation when things are coming down," said Art Hogan, chief market strategist at Wunderlich Securities. When oil is below $45 a barrel and "just falling on its own ... I think the market's saying, here's another red flag."

U.S. crude oil futures leaped to their highest since July 2015 on Monday after OPEC and some of its non-OPEC rivals reached their first deal since 2001 to reduce output in an effort to curb oversupply.

But "there are too many moving parts for OPEC's new policy to be sustainable in the long term. The strategy is bound to overshoot, in our view, leading to lower prices in the second half of next year," Michael Cohen, head of energy commodities research at Barclays, said in a Monday note.

7. Tensions overseas

In addition to uncertainty around U.S. growth and government policy, global concerns could hit stocks in the next year.

Tensions with China could flare into a trade war, while populism could accelerate with elections in France and Germany in the next few months.

"We're certainly perfectly willing to price in all the good things about the new administration ... but I don't think there's many times where we've talked about the other side of the story — the tariffs, the trade wars," Hogan said. "That may be the first quarter of next year's business, to realize the negative side of the story."

Gabriel Bouys | AFP | Getty Images