The bull market remains intact, but risks are mounting. Below, I examine the salient dangers and steer you toward a move that can simultaneously generate gains and provide downside protection.

First, let’s look overseas, to China.

The U.S. media would have you believe that we’re all on the verge of becoming the indentured servants of China. It’s true, China remains a formidable competitor, economically and militarily. However, the mercantilist mandarins in Beijing aren’t taking over the world. Not just yet.

For evidence of cracks in China’s supposed invincibility, consider the woes of China Evergrande Group (OTC: EGRNF). Renewed worries over Evergrande weighed on U.S. and global equities this week.

On Thursday, the major U.S. indices declined as follows: the Dow Jones Industrial Average -0.11 (-0.00%); the S&P 500 -33.76 (-0.72%); the NASDAQ -269.63 (-1.71%); and the Russell 2000 -51.50 (-2.27%). Asian and European stocks slipped, too.

Also generating market volatility are new lockdowns due to Omicron, especially in the U.K. Shifting news about the variant is causing investors to vacillate between optimism and fear.

Another big risk: inflation.

The U.S. Bureau of Labor Statistics reported Friday that the consumer price index jumped by 6.8% in the year through November, the fastest pace since 1982. The core rate of inflation (excluding food and fuel) rose by 4.9%.

Prices were up 0.8% from October, slightly slower than the previous monthly increase but still a fast rate (see the following chart):

Despite Friday’s hot inflation reading, investors decided to focus on positive economic news. Particularly promising has been jobs growth. The Labor Department reported Thursday that initial claims for unemployment insurance last week totaled 184,000, below the consensus estimate of 211,000 and the lowest reading since 1969.

After the opening bell Friday, the major U.S. stock market indices were trading in the green. Stocks continue to climb higher up the “wall of worry.”

China is adding to those worries. Fitch Ratings on Thursday downgraded China Evergrande and its subsidiaries to “restricted default,” meaning that the giant real estate developer has failed to meet its latest financial obligations.

Read This Story: Will The Global Dominoes Fall?

The company’s ambitious construction projects are ubiquitous in China. But more is at stake than just one real estate developer. Evergrande’s travails have stoked concerns that China’s residential and commercial property market, which drives about a third of the country’s economy, is on the brink of implosion.

Evergrande has the dubious distinction of being the world’s most indebted real estate developer, with more than $300 billion in financial obligations. The conglomerate’s vast real estate empire encompasses millions of apartments in hundreds of cities throughout China. Unpaid suppliers and owners of unfinished dwellings are furious.

How bad is the Evergrande crisis? The beleaguered developer recently asked employees to lend it money (which it hasn’t paid back). The company has been hit with a salvo of lawsuits from creditors and its shares have plunged more than 80% year to date. Companies up and down the Evergrande supply chain are getting stiffed.

Evergrande is just part of a wider problem. The world’s second-largest economy is groaning under a huge debt burden. China’s total debt to gross domestic product (GDP) exceeds 322%, with a credit imbalance of over $52.6 trillion in banking assets (see chart).

Over the past 20 years, Evergrande founder Xu Jiayin pursued an aggressive growth strategy. In addition to building houses, the sprawling firm entered other industries, including electric vehicles, life insurance, and sports.

Evergrande could go belly up. If that happens, financial contagion would tear through financial markets. You don’t need to own Chinese stocks for your portfolio to be vulnerable.

Analysts expect Beijing to force the company to reorganize, rather than giving it a bail out that sets a bad precedent for other Chinese companies.

Evergrande isn’t the only Chinese development company rapped by Fitch. On Thursday, the ratings agency placed a “restricted default” label on Kaisa Group Holdings (HK: 1638), which neglected to pay its bondholders $400 million this week.

China’s lack of transparency and past accounting scandals continue to cast doubts on the real health of the nation’s economy. And Beijing has planted the seeds of debt problems in other countries, too.

China’s lenders have been scouring the developing world for new borrowers, in part to help the country gain strategic leverage in regions that felt neglected by the West. Several countries in Africa, Asia and Latin America are deeply in hock to Chinese banks and many of those loans could become toxic, too.

Make this move now…

Whether China’s unfolding debt crisis triggers a global contagion remains unclear. But one thing is clear: you need to mitigate risk.

Are you looking for a trading methodology that withstands these unknowns and provides big gains, regardless of how the coronavirus, inflation, or Evergrande play out? Click here for details.

John Persinos is the editorial director of Investing Daily. To subscribe to John’s video channel, follow this link.