Investment guru Jim Paulsen says the stock market is only ignoring President Donald Trump's trade war tactics because of all the recent "fantastic" economic data.
"As long as the economic data stay good, as good as it's been, the Teflon around President Trump's trade war, the Teflon around [Federal Reserve Chair Jerome] Powell's tightening, is going to remain in place. The market is going to feel impervious," the chief investment strategist at The Leuthold Group told CNBC.
If those "fantastic fundamentals" slow down, which Paulsen thinks will happen, then the "Teflon comes off" and markets could tumble.
To be sure, Wall Street rebounded on Tuesday in a broad-based rally as investors brushed aside intensifying trade rhetoric between the United States and China.
Late Monday, Trump announced that 10 percent tariffs on $200 billion in imports from China would go into effect next week, escalating the tit-for-tat trade spat between the world’s two largest economies. China responded on Tuesday by unveiling 10 percent tariffs on about $60 billion of U.S. goods effective Sept. 24.
“Initially they were talking about tariffs in the 20 to 25 percent range, and that’s actually been lowered to 10 percent,” said Stephen Massocca, senior vice president at Wedbush Securities in San Francisco. “Maybe these numbers aren’t going to be as bad as initially thought,” he told Reuters.
“There’s much more pressure on the Chinese to reach a deal than there is on (the United States), at this point,” Massocca added.
By imposing tariffs on $200 billion more in Chinese goods starting next week, Trump has intensified his trade war with Beijing and triggered the likelihood of price increases for many American companies and consumers.
China says it will increase tariffs on $60 billion worth of U.S. goods Tuesday in a move that stands to hurt U.S. farmers and other companies that sell their products to China. Beijing may also raise obstacles for U.S. companies to do business in China.
Economists at Bank of America Merrill Lynch have warned that a full-fledged trade war, especially one that lasts more than a year, would slow the U.S. economy. By disrupting supply chains, eroding business confidence and heightening uncertainty, a trade war, they say, could “push the economy toward full-blown recession” and jeopardize America’s economic expansion — the second-longest on record.
The economy grew at a 4.2 percent annualized rate in the April-June period, the fastest in nearly four years and almost double the 2.2 percent pace set in the first quarter.
"There's no way the president can continue a trade war if the U.S. growth slows back into the 2s somewhere. I think he'd have to stop," he said.
For his part, Paulsen also sees other factors working against economic growth.
"You've got the Fed working hard to kill off the recovery, as well as the market, with tightening," he said. "You've got the president working to slow down global growth and Wall Street's depending on global sales to keep those steroid-induced earnings gains we've been experiencing going."
Material from the Associated Press and Reuters has been used in this report.
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