Despite the market's rebound this month near record highs, a number of market watchers and analysts say that stocks are far more fragile than they appear. They say that equities could descend into a "full-scale bear market," a decline of at least 20%. Or even worse, some see stocks falling dramatically further in a market crash.

Analysts at Citigroup say one realistic bear scenario may see the S&P tumble to 2,350, the 10-year Treasury yield fall to 1.5% or lower, and both gold and the dollar head higher. This would happen if no trade deal is reached and the Federal Reserve fails to cut interest rates. “Trade tensions appear to be mounting in a way that gives cause for concern, or at very least for heightened caution,” wrote Citigroup's Mark Schofield and Benjamin Nabarro, according to a detailed story in MarketWatch.

Citigroup’s 3 Scenarios

Bear Scenario: No trade deal, nor Fed cut

  •  Stocks enter a “full-scale bear market"
  • 10-year yield heads to 1.5% or lower

Bull Scenario 1: Trade deal at G-20 summit

  • S&P jumps to around 2,900
  • 10-year yields around 2.5%

Bull Scenario 2: No trade deal, Fed cuts rates 0.75%

  • Stocks hit new highs, performance varies among sectors
  • 10-year trades in 1.75% to 2% range, yield curve steepens

Source: Citigroup, MarketWatch.

What it Means for Investors

Schofield and Nabarro are far from optimistic about future trade negotiations, seeing tensions mounting rather than lessening, especially with President Trump at the helm. “Applying a game theory lens to the problem, one could argue that President Trump is likely to continue to take a hard line,” Citigroup's analysts said.

That ‘hard line’ is likely to mean increased tariffs on imports from China in the short term. With ongoing trade conflicts presenting the biggest headwind to the global economy, Citigroup says these mounting tariffs are the force that are likely to send U.S. stocks into a bear market.

Charles Hugh Smith, analyst and writer of the Two Minds blog, is more pessimistic than Citigroup, and argues that Fed rate cuts actually may achieve the opposite of their goal. "As a result of such ever-present central bank willingness to intervene in the stock market, participants have been trained to believe a stock market crash is no longer possible: should the market drop 10%, or heaven forbid, 20% (i.e. into Bear Territory), the Federal Reserve and the other global central banks will save the day with direct purchases," writes Smith, adding, "such complacent confidence in the efficacy of central bank interventions is actually setting up a crash scenario."

Smith sees a crash evolving as investors -- confident that central banks will step in to support markets -- continue to wade in and buy stocks on the dip. But as market fundamentals deteriorate, Smith says that bearish short sellers will eat away at the confidence of the bullish herd, leading to a free-fall in prices and complete loss of confidence in the power of central bankers.

Looking Ahead

To be sure, these pessimistic scenarios might be avoided if the world's two largest economies, the U.S. and China, are able to reach a comprehensive trade deal. But even Citigroup's best case scenario is hardly bullish, with a trade deal boosting the S&P 500 only to 2900, barely above where it is today.