December selloff warning from strategist who predicted last year’s rout

Seema Shah provides our call of the day, as she cautions that equities are at risk of another selloff if a partial trade deal can’t be reached before the next China tariff deadline on December 15.

“If that trade deal doesn’t happen and if everything falls apart and it feels like tensions are getting worse, then I think we are facing a potential repeat of last year, and it will be worse,” Shah told MarketWatch. She explains a “bigger shock move” would be probable because liquidity falls so much in December. (Read more about why another December meltdown is easily repeatable.)

But Shah thinks markets will get that trade deal because President Donald Trump is facing an election year and China can’t afford more economic pressure. Further support for stocks will come from a stabilizing global economy in 2020 and continued low-interest rate central bank policies. But she’s keeping her S&P 500 outlook for next year moderate—3000 to 3250.

Shah suggests a barbell-type equity strategy that balances risk/reward for investors. This means that on one end are defensive stocks—she likes higher-quality stocks, such as megacaps, which tend to be more insulated from geopolitical tensions, and real-estate investment trusts that perform well in a low-growth, low inflation climate.

And in a nod to a calmer economic front, on the other end are cyclical stocks, which are tightly correlated to economic activity. Here's what they are.