Chinese President Xi Jinping (R) waves to the press as he walks with US President Donald Trump at the Mar-a-Lago estate in West Palm Beach, Florida, April 7, 2017.
Jim Watson | AFP | Getty Images
Stocks could drop significantly if the United States and China both dig in during trade talks, Jeremy Siegel, finance professor at the Wharton School, told CNBC’s “Squawk Alley ” on Tuesday.
Tensions between the U.S. and China are high as U.S. Trade Representative Robert Lighthizer said Monday that new tariffs on 25% of goods will go through on Friday. Siegel said this causes major risk to the downside.
“If both sides dig in this market could go down 10% to 20%,” said Siegel. “It’s a question of what happens on Friday. If it does happen on Friday what is the retaliation of the Chinese? And that’s totally dominating the market for the next two or three weeks.”
Siegel said the market built in about a 90% chance that trade negotiations would be resolved with China. Since President Trump’s tweets on Sunday threatening to raise tariffs the market now yields about a 70% or lower chance of a resolution. This change is what is shocking the market downward.
The Dow Jones Industrial Average, S&P 500 and the Nasdaq Composite were all down more than 1.5% in midday trading on Tuesday.
Investors are waiting to see how the trade talks with China go this week but according to Siegel, President Trump will be watching the market.
“The strongest thing that Donald Trump has going for him in next year’s election is the economy and the stock market. He cannot afford that to falter,” said Siegel.
Siegel said Trump could potentially survive a mini sell-off if he comes through with a strong trade deal in the end. However, most people don’t like the volatility in the meantime.
The VIX, which is considered to be the best gauge of fear in the stock market, jumped more than 27% on Tuesday.
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