Stocks could tumble 20-30% on a 2nd-wave virus spike and China tensions, warns one long-standing market bull

  • Longtime market bull Ed Yardeni sees escalating US-China tensions and rising coronavirus cases placing significant pressure on the stock market’s steady rise.
  • Equity prices could slide 20% to 30% if the growing risks catch up with investors’ hopes for a smooth economic recovery, Yardeni said on CNBC.
  • The strategist’s comments arrived before the US closed China’s consulate in Houston and China vowed to enact “firm countermeasures.”
  • Investors might be best off searching for value abroad, as markets in China, Japan, and Europe “are a heck of a lot cheaper than ours,” the president of Yardeni Research said.
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The stock market’s rally from March may face a reckoning due to newly inflamed US-China tensions and soaring coronavirus cases, according to Ed Yardeni, president of Yardeni Research.

The market bull said stocks could fall 20% to 30% if new risks catch up to investors’ optimism for economic recovery. While economic data initially pointed to a quick bounce-back in activity, Yardeni now sees the market running on fumes.

“Overall I think the bull market is still intact but I think investors have to be concerned about a few things in the US,” he said on CNBC. “We’ve had a melt-up and that’s very visible in valuation multiples. Stocks are not cheap.”

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For one, the US doesn’t “seem to be handling the opening up of our economy” as well as governments in Asia and Europe have, Yardeni said. US coronavirus cases continue to climb, albeit at a slowing pace, and fuel concerns of a prolonged recession. The positive economic data seen in May and June is “vulnerable,” Yardeni said. Reversed reopenings stand to quash prior progress and halt stocks’ run-up.

The strategist also pointed to escalating tensions between the US and China as a downside risk for equity prices. Yardeni’s comments arrived before the US ordered the closure of China’s consulate in Houston. China fired back soon after, warning it would implement “firm countermeasures” against the US. The economic superpowers’ relationship has been strained in recent months, and the “increasingly and potentially dangerous conflict” between the two could spark a market meltdown, Yardeni said.

The market bull is already looking elsewhere for safe haven in case the US rally stumbles. Equities in China, Japan, and Europe present notable value, Yardeni said. With US bond prices also reaching lofty levels on the back of the Federal Reserve’s purchases, international markets might be investors’ best bet if domestic risks intensify.

“Those markets are a heck of a lot cheaper than ours when you look at forward P/Es,” he said. “It may be time to start looking overseas to see if there are better values with solid growth stories.”

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