In the wake of comments by President Trump regarding the trade war with China, and what has been up until now an extremely complacent stock market, some of the major investment banks fear that trade tensions with China may lead to a significant stock market correction.
Market fears resulting from an escalated trade fight between the United States and China could be so significant that it could send the S&P 500 into a correction, explained UBS strategist Keith Parker. In that bearish situation, Parker added, European markets and cyclical U.S. sectors including metals, mining and automobiles could be in for quite a drop.
Via CNBC, Parker said that UBS predicted a max trade-related sell-off of 19% back in the fourth quarter of 2018, but he now sees about 10% downside.
“With risks having increased, it is worth asking where the largest asset market moves could occur if trade tensions were to rise further,” the strategist wrote Tuesday.
Bank of America analysts explained that while a trade war would have an effect on major U.S. goods like automobiles, an escalation in the trade war could have damaging consequences on agricultural trade for the U.S. as well. China could decide to purchase more soybeans from Brazil instead of the U.S., thereby putting pressure on farmers throughout the country.
“Fasten your seatbelt and don’t hold your breath,” Bank of America strategists wrote Monday. “The latest escalation of the trade war was completely unexpected, despite the strength of the economy and the markets. This is evident from the immediate negative reaction of U.S. equity futures to the news.”
The markets are already showing some of this major fear, with the all of the major indices bleeding on the day. The Dow Jones Industrial Average is down about 1.75%, the S&P 500 is off 1.65%, and the Nasdaq is down almost 2%, with the markets continuing to fall precipitously.
Investors looking to hedge portfolios against this type of trade risk might consider an inverse ETF like the Proshares Short S&P 500 (RWH), or the ProShares Short Russell2000 (RWM), which look to capitalize on bearish markets and sudden drops based on market uncertainty, like what we are experiencing today.