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Trump's trade war with China could cause a stock market crash

Ignore the sucker’s rallies in these markets growing petrified about a full blown U.S.-China trade war — caution should be the name of the game for investors right now.

“We are pretty cautious on equities. We are asking people to pare some gains and perhaps start hedging their portfolio,” AdvisorShares Investments CEO Noah Hamman said on Yahoo Finance’s The First Trade on Tuesday. Hamman said the S&P 500 could dip a “little” below 2,550 — which in a new call out today is where investment bank UBS sees the index headed in 2019 — amid the realities of a full blown trade war.

At its current level of approximately 2,800, a drop in the S&P 500 to 2,500 would mark a 12% decline. Ugly.

“I think the ripple effect of what we are seeing could cause a lot of challenges in the market that lower interest rates [from the Federal Reserve] don’t fix,” Hamman added.

Over one-third of investors in a new Bank of America survey released Tuesday have taken out protection against a sharp fall in equity markets over the next three months. That marks the highest level in the history of the survey.

Indeed, caution on stocks look well placed at the moment.

The Dow Jones Industrial Average and S&P 500 both had their worst day since January 3 on Monday. At one point, the Dow was lower by more than 700 points on the session as China retaliated against fresh U.S. tariffs and new Trump tweets unsettled investors. The Dow went on to close down 617 points on the session.

Big-name companies with strong exposure to China such as Apple, Amazon and Caterpillar continue to trade with a downward bias.

Stocks staged a feeble rally on Tuesday as more tweets from Trump suggested a trade deal with China would get done sooner rather than later. But it’s buyer beware out there.

“I think a 5% to 7% pullback would be a minimal thing. A 10% correction could be what we are looking at,” veteran strategist Matt Maley at Miller Tabak told Yahoo Finance. Maley contends that still high stock valuations coupled with a new round of bad news in the form of the U.S.-China trade war could send stocks sharply lower.

Not everyone is bearish, however.

The “market will find its footing. You can see new highs in the S&P 500,” explained EvercoreISI chief technical analyst Rick Ross said on Yahoo Finance’s The First Trade Tuesday.

Brian Sozzi is an editor-at-large and co-host of Yahoo Finance The First Trade. Follow Brian Sozzi him on Twitter @BrianSozzi

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