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What are the biggest risks to U.S., China negotiations?

Megan Horneman, Verdence Capital Advisors, joined Yahoo Finance to discuss the biggest threats to U.S. and China negotiations.

Video Transcript

AKIKO FUJITA: Well, tensions over US-China relations again weighing on the markets today, in addition to some other headlines we got out of Beijing. I want to bring in Megan Horneman, who is with Verdence Capital Advisors to take a look at what this all means going into next week. Megan, you know, there's a number of things to kind of break down as it relates to China. We put it all under one umbrella, but there's certainly the US and China tensions that have been flaring up with the Senate introducing a bill now talking about how some companies should be potentially delisted if they're not willing to open their books. And then you've got the news that came out today-- the national security law as well as China saying, we're just not going to publish a forecast for GDP this year, because we just don't know. Pick apart those risks for us and how we should be looking at this.

MEGAN HORNEMAN: So I think that this is-- going into the summer months, you know, you have also seasonality, which becomes an oversight to the markets. But this is definitely probably one of the biggest risks that we see going forward, and especially since you look at the market and the S&P 500, for example, is up over 30%. So I know there's been some volatility today, but the market's really shrugging off this risk.

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Going into the election in the second half of this year, the US-China relationship is going to be front and center. President Trump has said-- you know, he's been very vocal about that. And he needs to rile his base that has been impacted the most from the coronavirus. So I think that this is one of the biggest risks that we have coming into the summer months, especially since the market is up as much as it is.

AKIKO FUJITA: We had Leila Miller from the China Beige Book on today who said, essentially, don't even think about the economic picture as it relates to China. You want to look at the political side of things-- the national security law that they are looking to pass that would essentially bring Hong Kong under the same umbrella. From the US side of things, how should we be looking at it? Is it about President Trump talking about potential sanctions because they want China to investigate the origins of the coronavirus? Is it a trade risk? You know, what's the US story that we should be watching?

MEGAN HORNEMAN: I think the biggest story here would be the actions that we take, especially if the tensions between the US and China from a tariff perspective start to heat up and we bring tariffs back to the table. This is something that I think would be the biggest risk to the US market. This hasn't really touched the US market much today. You saw, for example, the Hong Kong-- the Hang Seng was down about 6% today. But the US market seemed to be shrugging this off. So I think the biggest risk is if you start to see that that tariff talk is coming back to the table.

JEN ROGERS: Can we just talk a little bit more about seasonality? Because, you know, we have, of course, the old adage about sell in May and go away. And I just keep-- I'm just trying to figure it out this year how much that really counts, because we're just in such a different time. So how do you-- how do you evaluate that? I mean, I know-- look, we've got the statistics, and we can see what's happened in the past. But this is just something we've never seen before. So does it even matter?

MEGAN HORNEMAN: Right. Right, in the past four years, this actually hasn't necessarily come to fruition. We've had positive performance by the S&P 500 during those summer months. But history does suggest that the period between Memorial Day and Labor Day is the weakest period of return for the S&P 500. And I just think coming into this summer, the market being up as much as it is-- 30-some percent off of its low-- that it's pricing in perfection. It's pricing in the reopening.

And what we're going to be focusing on now in June and July is we're going to start to get some of that economic data from the reopening. You won't start to see that until the middle of the summer. So I think that there's plenty of room for the market to take a breather here, some consolidation. History does prove that in the one year after the end of a bear market, you do tend to get several pullbacks-- 5% to 10%. And in some instances, you even do try and test that low. So we would not be surprised at all to see some consolidation in the market here in the summer months.

AKIKO FUJITA: Megan Horneman with Verdence Capital Advisors, thanks so much for joining us. Have a good weekend.

MEGAN HORNEMAN: Thank you.