Tensions between the U.S. and China has been "bubbling up" over the past few weeks and represents a new set of risks that aren't priced into the market at current levels, Wilmington Trust head of investment strategy Meghan Shue said on CNBC's "Trading Nation."
At a time when the U.S. is slowly starting to reopen itself for business, the economy needs to deal with a potential trade headwind with China. Escalating tensions are something Shue said she worries about, especially as the market is pricing in a "pretty robust" V-shaped recovery.
Most recently, U.S. President Donald Trump said he will look at ways of revoking Hong Kong's special treatment.
Beyond the president, there is a general sentiment that there is "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."
Why It's Important
Despite clear warning signs, the market isn't as concerned as it should be, she said.
"The market is priced pretty much to perfection right now. A lot has to go right," Shue said.
"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."
Even if all of the recent gains are erased, investors with a time horizon of at least one year shouldn't panic, Shue said. But it does mean investors need to be diversified and understand the market won't "go up in a straight line," she said.
"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," Shue concluded.
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