Market P/E ratios, which recently rose to over 16x a week ago (and now stands at about 15x), fall to 13x-14x in the second half of the year. 2. Japan's economic growth experiment fails. The Bank of Japan completely loses control of the long end of the curve. The 10-year Japanese government bond yields move to between 2% and 3%, a problem for a country with debt-to-GDP of over 200%. The Nikkei cracks badly, and the recent decline becomes something far more than a correction. The Japanese yen continues to strengthen even though the Bank of Japan redoubles its efforts to weaken its currency, as the hedge fund unwinding of positions accelerates. This introduces a broad-based risk-off mentality of investors, which in turn impacts risk assets in Europe and in the U.S. 3. China's economic growth rate falls far short of expectations, decelerating to 6% or less in 2013 and 2014. This negatively impacts both emerging and developed market economies. Global growth turns recessionary as dislocations in the commodity markets accelerate further. More serious bank funding problems emerge in the region. 4. The eurozone's stagnating economic condition begins to retreat back to negative growth. In particular, the French economy worsens. The eurozone collapses under the weight of ever higher funding needs or there are so many restrictions that render the current rescue ineffective. Adding insult to injury, the German Supreme Court rules that the ECB's OMT is unconstitutional. The euro continues to strengthen as the European economies erode. Sovereign bond yields retrace the recent declines, and banking problems emerge. 5. A U.S. monetary policy mistake is made. A premature withdrawal of easing by the Fed (based on too-optimistic economic forecasts) could result in significant market downside. 6. A reverse rotation out of stocks and into bonds occurs. The much-anticipated rotation out of bonds and into stocks fails to develop as a risk-averse investment community, searching for yield, is stimulated by a rise in interest rates and shuns stocks in favor of the safety of fixed income. 7. Adverse geopolitical situations develop. Areas of potential conflicts (e.g., Syria, Israel, Iran, North Korea, China, Japan) have recently multiplied. 8. The ETF market implodes and carries stocks lower. Back in my surprise list for 2012, I cautioned about the risks inherent in the structure and popularity of ETFs. I might have been correct, though 12 months early! Over the last five to 10 years, many investors (retail and institutional) have clamored into ETFs as a means of acquiring diversified, liquid and low-transaction exposure to stocks, bonds, commodities and other markets.