Kass: 10 Key Factors That Could Send Us Into a Bear Market in 2020

The wise man considers the 'ifs' - the contrary - and constantly evaluates, and often rallies against, 'group stink'.

If we have learned anything in the last 11 years it is that Bull Markets Die Hard.

Many of those that were bearish in March are bullish today - not because of any meaningful fundamental reason or upward reassessment of S&P earnings - the prospects have deteriorated - but because price truly changes sentiment (H/T Divine Ms M).

Of course the "rip your face off rally" (that I expected) has had a big assist from the Federal Reserve - who's infusion of money into the markets, including corporate bond purchases, initially turned the market higher and has continued to generate a wave of "don't fight the Fed" thinking.

Not surprisingly, strategists' S&P price targets have gravitated higher coincident with the strong momentum in equities since mid-March.

The wise man considers the "ifs" - the contrary - and constantly evaluates, and often rallies against, "group stink."

In constructing this list, it is a tautology that the skeptical might look for something that contradicts the reasons for the market rising - that could cause a reversal.

The Fed won't likely stop but there are other issues that may adversely impact market psychology in the months ahead:

1. Worse Than Expected Earnings and Economic Growth - Technology earnings don't live up to a high bar. High profile and universally loved Microsoft (MSFT) disappoints. 2021 S&P EPS estimates (Goldman's Dave Kostin is estimating $170/share) fall to below $130/share. Despite weakening economic growth, bond vigilantes reappear (out of their caves of hibernation) - interest rates shoot higher (causing debt service credit concerns in both the public and private sectors).
2. Covid-19 Spreads and Fatalities Expand - Business shutdowns widen. A large, well known university closes - as the Covid-shock becomes an existential education crisis. Stay at home orders are put back in place in California, Florida, Texas, Georgia and Arizona. A reversal of announced sports re-openings (the original sports shutdown shook the markets). Consumer, business and investor sentiment plunges. There is no vaccine breakthrough in 2020 and vaccine development is pushed back.
3. A Sharp Rise in Bankruptcies (from current levels) - Cruise lines, real estate, hotels and and airlines - again falter, there's another turndown in their fortunes. Today, we will likely witness bankruptcies of CBL & Associates and Briggs & Stratton. Tomorrow (or later in the year), a major bankruptcy may be announced, leading to others falling over (like financial and operating dominoes).
4. The China/U.S. Rift Widens - China plays "hard ball" in the face of a likely Trump loss. Furious, the President retaliates. Larry Kudlow, the Director of the U.S. National Economic Council, resigns along with other members of the Administration's economic team (and market confidence falls). (Peter Navarro, assistant to the President and Director of Manufacturing and Trade Policy replaces Sir Larry). Global trade plummets.
5. President Trump's Popularity Falls Further - Losing his composure, a number of wild policy shifts are introduced - moving further to the right. Meanwhile, it becomes increasingly clear that the Democrats face a clean sweep Presidency, Senate and Congress - threatening the reality of higher taxes. Also, a number of past, controversial policy moves of recent months are exposed - like the Fed buying stock futures (shattering investor confidence). After picking Senator Kamala Harris as Vice President, Biden preannounces his Cabinet, including Senator Elizabeth Warren, who he intends to name Treasury Secretary, and Stacy Abrams as the Secretary of Labor nominee - markets recoil over the possible policy and market ramifications.
6. A "Wirecard-like" U.S. Fraud Shakes Markets
7. The Social Safety Net Begins to Fade/Policy Mistakes (Re)Surface - Federal unemployment benefits get extended but only a fraction of the $600. PPP is expiring in early August and either is not replaced or at a fraction of the previous level. The end result of both is less consumer spending and more challenged small businesses. Moreover, if Congress doesn't pass another fiscal stimulus or extension of some benefits it could get really ugly for many people and lead to more social upheavel (shaking market confidence).
8. Another Round of Widespread Riots - An intensification of violence from cities to suburbs that shakes confidence as social issues become more heated leading into the November election.
9. Speculative Stocks Collapse (check out CBL & Associates' imminent bankruptcy filing) - Turning Robinhood and his Merry Men back to Sherwood Forrest.
10. Market Structure (Passive Investing) Strikes Back - The romantic (March-July) move higher goes into reverse (and morphs into a horror show) - confirming my observation that "buyers live higher" but "sellers live lower." Risk parity implodes and the VIX is squeezed back to over 60.

(Microsoft is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells MSFT? Learn more now.)

(This commentary originally appeared on Real Money Pro on July 20. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)

At the time of publication, Doug Kass was Short MSFT, Long SDS (large), Short SPY.