Equity markets are heading into mid-year with lackluster gains. While few investors have been thrilled with this year’s performance, it could be much worse. We have yet to see a significant correction, equity markets remain within a few percentage points of all-time highs and volatility remains low.

Many clients have been asking: What could change? Or put differently, what could lead to a more severe market correction? So, I figured it was time for my annual look at the market risks that keep me up at night. While there’s a long list of things that could go wrong, here are four that I would focus on for the summer.

1. Ukraine. There’s no way of knowing how events in Ukraine will play out, but what’s clear is that for now, the market is paying scant attention. Even during last week’s sell-off, market volatility, as measured by the VIX index. never got above 14. An escalation in Ukraine-related violence and more sanctions against Russia don’t appear to be priced into financial markets and would both likely lead to increased selling.

2. Europe. With many of Europe’s former problem children enjoying all-time low bond yields, it seems a strange time to worry about Europe. However, while bond yields have dropped, risks remain.   Sovereign debt levels continue to climb; growth, while improving, remains anemic; and the currency zone is flirting with deflation. Outside of the economic risks, there are growing political risks. The European parliamentary elections may illustrate just how much damage has been inflicted on the region’s main political parties. For example, while economic conditions in Greece have improved – from abysmal to merely poor – the political situation has not. The government is teetering, with a razor thin two-seat majority.

3. China. My base case scenario is a modest deceleration in the Chinese economy. So far, while the country’s economic data has been weak, it has conformed to that scenario. That said, the Chinese government is attempting a difficult balancing act: slow down the real estate market and credit expansion without cratering growth. A sharp and unexpected drop in growth would not only pose a risk to China, but with China as the world’s second largest economy, it would pose a risk to the global economy as well.

4. U.S. Bond Market. Why worry about interest rates with bond yields at six-month lows? Because, as everyone experienced last May, with rates at these levels, bond prices can reverse violently and abruptly. I would focus on two near-term and interrelated risks related to the bond market: a change in Federal Reserve (Fed) language and aggressive selling of bond funds by retail investors. Year-to-date, investors have been piling into bond funds. However, even a subtle shift in the Fed’s tone could quickly change that pattern. The risk of retail outflows is heightened by the fact that many recent bond buyers are desperately seeking yield rather than committing to the asset class. A turn in rates could produce a quick turn in flows. (You can read more about the potential impact of the end of easy money in a new BlackRock Investment Institute paper I co-wrote, The Disappearing Act .)

To be sure, I do expect equities to move higher over the course of the year. But as I’ve discussed previously, given last year’s extreme multiple expansion, 2014 was always going to be a more difficult year for stocks. Any of the above could quickly turn a difficult year into a bad one.

Sources: Bloomberg, BlackRock research

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to   The Blog  and you can find more of his posts   here .

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