4 Risks That Could Topple the Stock Market

The four-year-old bull market appears to have plenty of life left. From the bear market's bottom in March 2009 through February 1, Standard & Poor's 500-stock index returned a sturdy 143% (or 26% annualized). And yet, stocks still represent good value, selling at an average of just 13 times next year's estimated earnings, below the ten-year average of just over 14. Market strategist Ed Yardeni thinks the S&P 500 could close at 1665 by year-end, a 10% gain from its February 1 close.

But that doesn't mean stocks won't pause or even stumble along the way. Here are the key risks that could derail the market.

1. Irrational Exuberance

Given the stock market’s sharp advance since mid November, a pullback of 5% to 10% could occur at any time. Such retreats occur in the normal course of bull-market sprints. But if stocks keep rising too far too fast — say, the Dow Jones industrial average sails well beyond 15,000 by midyear — then a deeper pullback could ensue as fears of another bubble emerge.

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2. Global Uncertainty

Crisis fatigue and austerity backlash in the euro zone could undermine aid for struggling countries, such as Greece, and reignite Europe’s financial crisis. If China’s annual growth rate drops far below its expected 8%, it could put a serious dent in the global economy. Plus, turmoil in the Arab world makes the always worrisome Middle East more dangerous than usual.

3. Rate Squeeze

The Federal Reserve says it won’t consider hiking interest rates until the jobless rate drops to 6.5%. That might not happen until 2015. But strong growth in payrolls (or other signs of an overheated economy) or a surge in inflation (oil prices are up $10 per barrel since November) could bring higher rates sooner. So could a change in policy when chairman Ben Bernanke steps down in 2014.

4. Fiscal Woes

If ongoing debate in Washington, D.C., is marred by budgetary brinksmanship, and a deeply divided government keeps lurching from one crisis to another, confidence in the U.S. economy could be undermined, America’s debt rating could again be downgraded, and the stock market could take a shellacking. Leaving too much unsettled will heighten uncertainty, which investors hate.