The market is underestimating the risk of a trade war and will likely see a correction once it is confronted with “cold water in the face,” Guggenheim Partners’ Scott Minerd warned on Monday.

“Investors are just ignoring the consequences and what’s going to have to be done in terms of Federal Reserve policy to offset the inflationary pressure that’s going to come out of tariffs,” said Minerd, the firm’s global chief investment officer.

In other words, he’s concerned tariffs will result in higher inflation, which will push the Federal Reserve to continue its tightening or even pick up the pace of interest rate hikes.

Minerd spoke with CNBC’s “Closing Bell” after tweeting earlier in the day that the market rally was the “last hurrah” and “investors should sell now.”

Minerd tweet

Stocks appeared to shake off trade fears on Monday, closing sharply higher. The Dow Jones Industrial Average rallied more than 300 points, while the gained 0.7 percent.

The latest trade salvos came on Friday, when President Donald Trump’s tariffs on $34 billion worth of Chinese goods took effect. China then fired back with retaliatory tariffs on $34 billion worth of U.S. goods, including soybeans and pork.

Trump also expects to soon add a further $16 billion in tariffs and will consider up to hundreds of billions of dollars more in duties.

Meanwhile, the U.S. has also placed duties on steel and aluminium from Canada, Mexico and the European Union, key allies. They have responded with retaliatory measures. Trump has also threatened to place tariffs on autos imported from the EU.

Autos make up about 6 percent of the consumer price index, Minerd said. And if there were a 25 percent tariff on them, with 100 percent pass through, it would add 1.5 percent to inflation, he said.

“People are being confused by the idea that if you place a tariff on a foreign good that somehow that doesn’t pass through to domestic consumer,” he noted.

However, when duties were imposed on washing machines earlier this year, prices jumped by 17 percent, Minerd added.

That said, he thinks the market tends to react slowly to change, and this is a seasonally strong time for the market, he added.

But in the end, he thinks investors will be “confronted with cold water in the face.”

“This could go in through the rest of the summer before we start to see some sort of a correction occur in September or October.”

This isn’t Minerd’s first warning about the stock market. In March, he told clients the market is on a “collision course with disaster.” He expects the worst of the damage to start in 2019 and 2020, predicting a sharp recession and 40 percent decline in stocks.

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