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Analyst: Risk of US-China Fallout Not Priced Into Markets

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Analyst: Risk of US-China Fallout Not Priced Into Markets

The stock market rally keeps chugging along, with the Dow crossing over 25,000 and the S&P 500 breaking above 3,000 last week on optimism surrounding the economy slowly reopening and continued hopes for a vaccine against the coronavirus.

The escalating threat of a US-China trade war could tear it all down. This is according to Meghan Shue, the head of investment strategy at Wilmington Trust.

Shue expressed that many feel worried about U.S.-China tensions escalating. “We’ve seen them bubbling up in recent days and weeks and we think that’s probably going to continue. We think the tension with China is going to ramp up into the election… from a market perspective that is definitely a concern,” Shue said on Friday during an appearance on CNBC’s ‘Trading Nation.’

Trade Tensions and Politics

Trade tensions escalated last week. It came after President Trump said he would take steps to revoke Hong Kong’s favored trade status with the U.S. Also, this happened after China’s parliament passed a controversial new security law that would effectively bar political protest in Hong Kong.

From a political perspective, Shue says that President Trump has to stand his ground with China. Shue also mentioned that not much room exists on the political stage for anyone who seems to treat China softly. She also said that it’s one of a “number of risks I don’t think are adequately priced into the market that could see a resurgence.”

She can “make a case for some risks around the presidential election,” she said. This includes “risk around the US-China trade tensions, those might not be adequately priced into the market,” as per Shue. “So any sort of downside risk that the investors wake up to would be enough to set the market lower and see a resurgence in volatility.”

The market has prices “pretty close to perfection right now,” Shue believes. She worries that the expected v-shaped recovery just won’t materialize.

“We see the economic hit being very dramatic — probably 40% on GDP for the second quarter,” said Shue. She also says it seems the market’s pricing “in a pretty robust V-shaped recovery, and we just don’t see that as likely.”

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Priced to Perfection

She says that with the market priced to perfection, it will take everything going right to warrant today’s stock prices. This includes the economy reopening, a vaccine and more government stimulus. Any slip up could mean a quick reversal in stock prices.

“The market is priced pretty close to perfection right now,” she starts. “A lot has to go right. And there’s been a reason for increased optimism over the past few weeks, we’ve seen progress on vaccines, really robust response from the federal government and Federal Reserve in terms of stimulus and cash transfers. But where we stand today the market is pricing in for a continued progression in terms of that linear direction and we just don’t see that as likely. Any misstep on a number of fronts whether it’s to the vaccines or businesses that are not able to reopen as many anticipate — that would be reason for the market to give back some of these gains.”

When asked where she sees investing opportunities, she pointed out an area that will struggle. Also, she surprisingly recommended retail, an area hit particularly hard during the economic shutdown.

“We are finding opportunities beneath the surface in specific industries. In consumer discretionary where you are going to have a difficult consumer environment over the next 12 months, areas like off-price retail which stand to benefit from some of the bankruptcies from bigger retail giants as well as a step-down in price from consumers as they are recovering from this economic malaise.”

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