There’s An Ominous New Risk “Bubbling Up” In The Market

The market is downplaying this escalating risk at its peril. Here’s what you need to know.

The market has been doing a funny thing lately.

Despite the ever-escalating pandemic. Despite the social unrest and protests that have rocked the nation. The market just keeps climbing higher.

On Thursday, the Nasdaq 100 briefly hit an intraday record, erasing nearly all of its loss amid the coronavirus market sell-off. The S&P 500 is up 39% since the March 23 bottom. The Dow is up 41%. And the Nasdaq Composite has gained 40% since the bottom.

Meghan Shue, investment strategist at Wilmington Trust, said this week that while the coronavirus is still the biggest risk to the market, there’s another headwind that the market is ignoring.

“We are definitely worried about U.S.-China tensions escalating,” Shue said. “We’ve seen them bubbling up in recent days and weeks… There are a number of risks that I don’t think are adequately priced into the market that could see a resurgence.”

President Donald Trump has been increasingly tough on China for its handling of the coronavirus outbreak and its power grab in Hong Kong. With the rhetoric between the world’s two largest economies becoming evermore heated, there are looming concerns that the phase one trade deal signed early this year could be thrown out.

“There’s not much room on the political stage for anyone that is seen as going soft on China,” Shue said. “We think the tension with China is going to ramp up.”

“The market is priced pretty much to perfection right now. A lot has to go right,” Shue added. “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.”

Shue is anticipating “probably 40% on GDP for the second quarter,” and warned that “the market, to me, is pricing in a pretty robust V-shaped recovery, and we just don’t see that as likely.”

Given the coronavirus and the rising tensions with China, Shue warns that the market is dangerously downplaying the current risks.

“The market needs to be pricing in a little bit more of that downside risk for me to get really excited about stocks at the moment,” she said.

BTIG’s Julian Emanuel says that due to the escalating risks, investors should brace themselves for a 15% to 20% pullback.

“It’s probably time for the market to reassess the uncertainties to the economy,” Emanuel said. “The social unrest of the last few days just adds to that sort of menu of uncertainties. …The environment is a bit more volatile now. The risk has clearly risen.”