Wall Street investors are enjoying a multiday rally, with the Dow Jones Industrial Average poised for a six-session advance, but strategists at Citigroup say looming trade tensions still make a bear market a possibility if the Trump administration’s tariff disputes aren’t resolved favorably.

“Trade tensions appear to be mounting in a way that gives cause for concern, or at very least for heightened caution,” wrote Citi’s Mark Schofield and Benjamin Nabarro, in a research report reported dated June 10.

The strategists make the case that a summer recess set to get under way for the U.S. Congress makes policy uncertainty a persistent threat to markets considered risky over the near term. Schofield and Nabarro say the most likely outcome in the international trade scuffles, with the U.S. at the center, is mounting tensions rather than a lessening of trade animosities. That includes the possibility that the U.S. will increase import duties, at least temporarily, on all Chinese imports in a ‘shock-and-awe’ strategy.

“Applying a game theory lens to the problem, one could argue that President Trump is likely to continue to take a hard line,” the analysts said. That could help drive stocks into a bear-market, which is usually defined as a drop of at least 20% from a recent peak.

Trade disputes have been the strongest headwind for global economies because such disagreements hold the potential to weaken economic output.

With that thinking in mind, the Citi analysts anticipate a trio of market outcomes as tariff negotiations progress ahead of the G-20 meeting this month:

Trade deal at G-20
  • Stocks soar along with emerging markets as the outlook for the global economy improves, with the S&P 500 index jumping to around 2900
  • The 10-year Treasury note yields about 2.5%
  • Gold heads to around $1,300 an ounce from current levels
  • The U.S. dollar heads slightly lower but capped by lower expectations for Fed rate cuts
No trade deal, nor Fed cut
  • Stocks enter a “full-scale bear market.” S&P 500 falls to 2,350
  • 10-year heads to 1.5% or lower
  • Gold jumps to $1,600
  • The dollar jumps against most currency rivals
No trade deal but Fed cuts rates 3/4 of a percentage point
  • Stocks hit news highs, but not all stocks and sectors will perform well
  • 10-year Treasury note trades at a range of 1.75% to 2% and the yield curve steepens
  • Gold heads to $1,500
  • U.S. dollar weakens

As it stands now, the S&P 500 index

SPX, +0.48%

was trading sharply higher, up more than 1% midday Monday, just about 44 points from its April 30 record, and trading up 15.8% so far in 2019. Meanwhile, the Dow

DJIA, +0.32%

also has seen the benchmark on pace for year-to-date gain of 12.3%, while the Nasdaq Composite Index

COMP, +1.06%

was climbing, with a return of nearly 19% in sight so far this year, according to FactSet data.

All three stock benchmarks have climbed by at least 5% so far in June.

Meanwhile, the 10-year Treasury note

TMUBMUSD10Y, +3.11%

benchmark was at 2.14% from 2.0855% on Friday and gold futures for August delivery

GCQ19, -1.03%

were around $1,332 an ounce, set for a year-to-date gain of 4%, while the U.S. dollar, as measured by the ICE U.S. Dollar Index

DXY, +0.20%

was at 96.902.

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