Trading Nation

Stocks are at risk of a 10% drop, but this sector is a 'win-win' either way, strategist says

Stocks are at risk of a 10% drop, but this sector is a 'win-win' either way: Strategist
Stocks are at risk of a 10% drop, but this sector is a 'win-win': Strategist

Talk about a positive prognosis.

While stocks could fall as much as 10% if the United States and China are unable to reach a trade deal by a Dec. 15 tariff deadline, health-care stocks are poised to rally regardless of what happens, says Matt Maley, chief market strategist at Miller Tabak.

"The Number 1 thing that would really hurt the market and knock it down 10% would be that we get no deal and they do raise the tariffs on December 15th. That's a low probability — I even put that below 20% — but people do need to keep that out there and consider it," the strategist said Wednesday on CNBC's "Trading Nation." The date is when the Trump administration plans to put through its next set of tariffs on Chinese goods if it can't reach a trade deal with Beijing.

With the market pricing in not just a pause in tariffs, but a rollback, Maley said the risks were still brewing. He warned that stocks could pull back by 4-6% even if the Dec. 15 round of tariffs were postponed instead of canceled.

While health-care stocks, tracked in part by the Health Care Select Sector SPDR Fund (XLV), didn't exactly surge when the stock market was sent lower by U.S.-China trade issues in May and August, they're in a better position to climb now that some of the political noise around the sector has softened.

"[Health-care] outperformed back then in those two months by going sideways, and that's because it ... had some of these political issues surrounding the Elizabeth Warren campaign. Those have been pushed to the side," Maley said. "And, of course, we've seen a huge breakout in the XLV."

"It's broken well above its all-time highs," Maley added. "It is a little overbought on a near-term basis, but I believe that it's broken out so strongly that even after ... it works off that overbought condition, it's going to rally higher ... if we do have a big scare on the tariff side. But it also should rally even if the whole market moves up. So it's kind of a win-win situation, again, after a little bit of a breather on the near term."

The XLV closed at $99.75 on Wednesday, up nearly 1% and opened flat on Thursday.

Michael Bapis, managing director with Vios Advisors at Rockefeller Capital Management, pointed out in the same "Trading Nation" interview that while stocks have "run up quite a bit" into year-end, people are staying invested for now.

"Everybody's hanging on the last 15 to 25 days of the year to try to lock these returns in ... if nothing gets messed up going into next year," Bapis said.

On the trade front, Bapis gave a no-deal scenario less than 50% odds, saying it "would be a disaster" if it happened.

"I think what's more likely to happen is a neutral to very positive scenario," he said. "Neutral [is] where we come to some agreement of a deal: The details aren't there yet, but we've moving in the right direction. Super positive would be a deal and no tariffs."

In Bapis' book, regardless of what happens, economic growth is still intact, monetary policy is still relatively easy and "the tax law easing is starting to take effect," all of which puts stocks in a good position regardless of trade.

"If we can remove ourselves from just this one specific topic of ... trade and tariff[s], as hard as it may be, we're in a really good position from a market standpoint, earnings standpoint, earnings growth standpoint," he said. "So, we will be watching December 15 or prior to, if something changes before then, and I think you're going to see a lot of volatility up until that point and there may be even more volatility after."