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Investors are dangerously downplaying coronavirus and trade risks, Wilmington Trust's Meghan Shue warns

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Trade tensions with China will ramp up, Wilmington Trust's Meghan Shue warns

Just as the economy is trying to reopen, the market is facing a new risk: Renewed trade tensions with China.

Wilmington Trust's Meghan Shue warns the threat is putting the strong rebound off the March 23 low in jeopardy.

"We are definitely worried about U.S.-China tensions escalating. We've seen them bubbling up in recent days and weeks," the firm's head of investment strategy told CNBC's "Trading Nation" on Friday. "There are a number of risks that I don't think are adequately priced into the market that could see a resurgence."

President Trump has been looking to take action against China in connection the coronavirus. He has been questioning the country's forthrightness regarding the severity of the outbreak.

On Friday, the President said he'd look to eliminate special treatment toward Hong Kong after China imposed a law that would prohibit political protests. 

"There's not much room on the political stage for anyone that is seen as going soft on China," said Shue, a CNBC contributor. "We think the tension with China is going to ramp up."

Shue, who went slightly underweight in stocks last winter as the market was selling off on virus fears, contends there's more trouble ahead on that front, too.

"We see the economic hit being very dramatic — probably 40% on GDP for the second quarter," said Shue. "It looks like the market to me is pricing in a pretty robust V-shaped recovery, and we just don't see that as likely."

The S&P 500, Dow and tech-heavy Nasdaq are coming off two months in a row of gains. With one month left in the second quarter, the market is seeing its best quarter since 1998.

According to Shue, the market's strong showing suggests investors are dangerously downplaying the risks.

"The market is priced pretty much to perfection right now. A lot has to go right," she 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."

Shue warns the virus remains the biggest overall risk to the market.  Even though that could wipe out gains, she is encouraging long-term investors with at least a 12 month time horizon to stay in the stock market.

"That doesn't mean you have to get overly negative on stocks. But it does mean that you should be properly diversified and not expect the market to go up in a straight line," she added.

Shorter-term, she believes the market's risk versus reward will continue to get murky.

"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 said. 

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Coronavirus and China risks are not adequately priced into market: Meghan Shue