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Why Trump's trade war with China could quickly send stocks down more than 10%

Brian Sozzi
Editor-at-Large

Bye-bye rip-roaring stock market rally. Hello volatility and stock prices off their highs for the year as President Donald Trump’s trade war with China reaches new heights.

“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 said on Yahoo Finance’s The First Trade Monday. Maley contends that still high stock valuations coupled with fresh bad news in the form of the U.S.-China trade war could send stocks sharply lower.

Markets look poised to test Maley’s thesis.

A new round of Trump weekend tweets on China’s trade position sent the S&P 500 down by 2.26%, or 65.19 points, as of 10:04 a.m. ET today. The Dow Jones Industrial Average dropped 2.15%, or 558.58 points, while the Nasdaq Composite declined 2.92%, or 232.6 points.

On Friday, the Trump administration raised the rate of tariffs on $200 billion worth of Chinese imports to 25%, and announced that further tariffs on another $300 billion in imports would be forthcoming. Trump has claimed repeatedly that China “broke the deal” the two sides had been working toward over the past several months, leading to the use of tariffs to try and extract further concessions. Tariffs will raise prices, who is going to pay for that — more likely than not, it’s going to be the consumer.

China responded forcefully today.

The country said it would impose a tariff rate of as high as 25% on a portion of $60 billion worth of U.S. goods starting June 1. Thousands of goods are believed to be impacted.

Customers stock up on TVs, electronics, toys and home goods at Walmart in Bentonville, Ark. (Gunnar Rathbun/AP Images for Walmart)

Maley says investors need to pay careful attention to retail stocks as many, such as Walmart, source a good portion of their products from China. A full blown trade war could raise Walmart’s costs, which would likely be passed onto consumers to some extent. Consumers, in turn, could choose to purchase fewer items much to the detriment of U.S. economic growth.

In particular, Maley believes Amazon’s stock is a key bellwether for this more nervous market.

“Amazon is kind of all of retail. The stock is starting to see a little bit of cracks, not major. But if it does start to roll over that would signal the consumer is starting to pull on its horns, that could mean second half [economic] growth will not be as strong as people are looking for,” Maley explained.

Emily McCormick contributed to this story.

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