Many investors think that this bull market and economic expansion have gone on long enough and a bear market and a recession will take place soon. In my view, we have at least a year or two before the next major downturn in either the market or the economy, barring a major geopolitical conflict such as a shooting war with North Korea, Russia or Iran. A 10%+ correction could occur at any time because sentiment is so optimistic, but the signals that usually warn of a recession, like a loss of economic momentum or an inverted yield curve, are not in place.

Every year for the past 33 years I have prepared a list of Ten Surprises. These are events that could impact financial markets and that I believe have a better than 50% chance of taking place. Most investors, as I assess it, would give each of the Surprises only a one-in-three probability. The Surprises of 2017 turned out pretty well, with about six of the ten close to the mark. My objective in creating The Ten Surprises is to stretch my thinking, and hopefully yours; not to get a high score. This essay will discuss the 2018 Surprises in greater detail than I did last month, when I merely listed them.

My first Surprise is that China will decide to cease shipments of food and fuel to North Korea unless Kim Jong Un stops the development of nuclear weapons. China accounts for a very large part of North Korea’s food and fuel imports, and if the flow of these essential resources were to stop, the North Korean economy and its people would be severely hurt. Up until now the Chinese have resisted taking this action because they like having a communist buffer between themselves and South Korea. At some point China will decide that tolerating a nuclear-armed neighbor led by an unpredictable person is unacceptable and they are willing to take action. There is, however, something else that China would achieve. The whole world would like to prevent North Korea from having a nuclear weapon. The Chinese, by taking steps to prevent this development, would catapult themselves to a prominent position as a leader in global affairs. That is a position they aspire to, and this ambition may be part of their motivation to act. Time is a factor here. The longer we go without a military confrontation with North Korea, the less likely it is we will have one. The opening of talks between North and South Korea is a constructive sign. So far, I have gotten more pushback on this Surprise than any other.

For the second Surprise, I said that populism, tribalism and anarchy would continue to be political forces around the world. The Brexit vote on June 23, 2016 was probably the first hard example of populism, and it has had a major impact on the British economy. Real growth there was 2% in the fourth quarter of 2016 and it is 1% now. Even though the next election in the U.K. is not scheduled until 2022, a special election could be called if there were two closely consecutive votes of no confidence or a supermajority of Members of Parliament supported the action. (The latter would require some Tory votes.) Should the weak economy force such a move, I believe the Labor Party candidate Jeremy Corbyn would become Prime Minister on the promise that he could get the economy growing at a more satisfactory rate. While populism continues to be a divisive movement, most notably in Spanish Catalonia, the unexpected positive consequence of the Brexit vote has been to bring the countries of continental Europe closer together. The European Union is stronger than ever before and the economic outlook for that region continues to be favorable. The initial reaction to the Brexit vote was that European unity would be weakened.