Chinese President Xi Jinping (R) billows 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 Idols
Stocks could drop significantly if the United States and China dig in during trade talks, Wharton finance professor Jeremy Siegel related CNBC on Tuesday.
Tensions between the U.S. and China are high as U.S. Trade Representative Robert Lighthizer said Monday that new imposts on 25% of goods will go through on Friday. Siegel said this causes major risk to the downside.
“If both sides dig in this Stock Exchange could go down 10% to 20%,” Siegel said on “Squawk Alley. ” “It’s a question of what happens on Friday. If it does prove on Friday, what is the retaliation of the Chinese? And that’s totally dominating the market for the next two or three weeks.”
Siegel thought the market built in about a 90% chance that trade negotiations with China would be resolved. Since Trump’s tweets on Sunday inauspicious to raise tariffs the market, the market now projects no more than a 70% chance of a resolution, he said. This trade is what is shocking the market downward, he said.
The Dow Jones Industrial Average, S&P 500 and the Nasdaq Composite all closed down sundry than 1.6% on Tuesday.
Investors are waiting to see how the trade talks with China go this week but Trump drive be watching the market, Siegel said.
“The strongest thing that Donald Trump has going for him in next year’s selection is the economy and the stock market. He cannot afford that to falter,” said Siegel.
Siegel said Trump could outlive a mini sell-off if he comes through with a strong trade deal in the end. However, most people don’t like the volatility, he state.
The VIX, which is considered to be the best gauge of fear in the stock market, jumped more than 26% on Tuesday.
Subscribe to CNBC on YouTube.