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Tuesday's stock market sell-off may be a lot more than just a blip.
Citi Private Bank's David Bailin believes a bigger pullback could be on the way — one hinging on the notion that President Donald Trump is losing political clout.
The president suffered a blow on Monday when FBI Director James Comey and NSA Director Adm. Mike Rogers discredited Trump during a congressional hearing over accusations that President Barack Obama wiretapped Trump Tower during the election.
There's concern the latest developments could create a domino effect on Capitol Hill, sidelining legislation such as tax cuts that Trump wants to pass, according to Bailin.
"We think that could have a real implication for where the market goes," the bank's global head of managed investments said Tuesday on CNBC's "Futures Now." "Yesterday, was a pretty significant torpedo in the certainty with which people have been acting."
He noted that it "potentially indicates a weakening of Trump's ability to influence the political process."
The latest challenge comes just as the House Rules Committee is scheduled to hold a hearing Wednesday on the Republican health care bill. A vote by the full House on it is expected Thursday. Trump hopes the legislation ultimately replaces the Affordable Care Act, also known as Obamacare.
Just as the drama increases on the hill, Citi Private Bank, which has $390 billion under management and caters to high net-worth clients, believes the markets are priced for protection, but it has been telling investors the odds of a major pullback are increasing.
"The idea that we couldn't see some type of pullback in Q2 or early Q3 as you head into the summer months is kind of silly," Bailin said.
And, there's a second factor sitting high on Bailin's watch list: oil. Crude closed at $47.34 a barrel on Tuesday for its lowest settle since Nov. 29. Bailin has been viewing oil as the first wall of worry — albeit "small" — since the election.
"If we were to go back just about 45 days ago, ... oil would be trading between $50 and $60. That the trend would be higher generally over the course of the year and oil would take part in this reflation trade," he said. "We've seen the exact opposite take place."
Bailin points out that supply concerns have become dominant, saying "we've seen issues on whether or not OPEC, and specifically Saudi Arabia, can in fact curtail the supply of oil." This could bleed into the stock market in the form of downward pressure.
Despite the risks in Washington and headwinds from oil, Bailin believes there's still some opportunity to make profits in this environment. He says the key is to look outside the U.S. by focusing on the emerging markets.
The world's largest asset management firm sees a hazard emerging from today's rising interest rate environment — one which could create painful losses for investors.
Michael Fredericks, who manages the BlackRock Multi-Asset Income Fund, is telling investors to protect themselves against holding bonds, particularly shorter-term ones, because as rates increase their values generally decline.
"We're not running a lot of duration. We haven't been. We've been particularly concerned about positioning at the front end of the curve," said Fredericks recently on CNBC's "Futures Now."
He believes the market may have started to bake in a much higher trajectory than what was conveyed during the Federal Reserve's decision on rates last Wednesday. Fredericks also said Fed policy will likely have an out-sized impact on the front end of the curve.
To cope with the risk, Fredericks' is betting against Treasury futures at the two and five year point of the yield curve, while betting on longer-term instruments on the back end. He predicts bond prices, which trade inversely to their yield, will likely be held down by a slower rate of long-term GDP growth.
Currently, the two year Treasury is trading near its highest levels since August 2009, while the five-year treasury is sitting around six year highs. That dynamic spells higher returns for bond investors, but puts upward pressure on borrowing costs.
Fredericks' fund, which is up more than nine percent over the past year, is now betting more on bank loans and collateralized loan obligations (CLOs), citing the strength of recent economic data and investor demand.
BlackRock predicts there's a 50 percent chance that the Fed will raise interest rates again June. That would be the third time since last December.
Fredericks also questioned whether President Trump's election win and rhetoric is responsible for the stock market surge. The Dow Jones Industrial Average has soared by more than 14 percent since then.
"It wouldn't have been my base case that in the middle of March that we wouldn't be talking about fiscal stimulus, we wouldn't be talking about impending tax cuts, but these have really kind of fallen off the radar," added Fredericks. "I'll assume they will come back to the front burner at some point. But, those really haven't been driving markets higher."
He noted the real culprit behind the rally has been the economic picture, which has been a bright spot.
"We're surprised ourselves on how strong the incoming economic data has been," said Fredericks. "Is this or is this not a Trump rally? I do wonder whether the market is not so focused on 2017 P/E multiples, but looking out a little bit further to 2018 or 2019."
Fredericks isn't just concentrating on the bond market. He also encouraged U.S. investors to look at equities overseas.
"We've come a long way really quickly. The valuations, we do think, are a bit of a headwind. At the margin, we've been taking money out of U.S. equities with a preference towards European stocks," he said.
One of the bond market's biggest players has a message for the Federal Reserve as it ponders its decision on interest rates.
Pimco's Tony Crescenzi said the Fed must not shy away from raising rates this year. If it does, it could mark the return of "bond market vigilantes."
That's the term given to investors who protest inflationary policies by selling bonds. This, in turn, pushes yields higher, and could create serious headwinds.
"What's very important to the Fed is to control the bond market vigilantes," Pimco's market strategist and portfolio manager said Tuesday on CNBC's "Futures Now." "Keep them from worrying about inflation."
The central bank announces its decision on interest rates at 2 p.m. ET Wednesday.
The Fed, he says, can accomplish this by sounding hawkish, showing resolve against inflation and raising interest rates when the bond market and the stock market says it's OK to do so. Otherwise, Crescenzi believes the 2013 "taper tantrum" highs would be the next major stop for 10-year Treasury yields.
The 10-year yield hit an intraday high on Tuesday of 2.639 percent — the highest since the day after the last Fed meeting.
The futures market is forecasting a nearly 100 percent chance later Wednesday of a rate hike, according to the CME Group. The last 25-basis point hike, announced on Dec. 14, lifted the Fed funds target rate to 0.50 to 0.75 percent, a number that's still considered historically low.
Pimco's official projection calls for two to three hikes this year, and a similar amount next year.
"The market still thinks that the Fed in the year 2020 will have its policy rate somewhere around 2 percent or so," Crescenzi said.
Overall, he's optimistic on the strength of the economy. Yet he's "leery" of the White House's ability to permanently boost U.S. growth. Even if tax cuts become a reality under President Donald Trump, they may not last, and that could create an issue down the line, he said.
"Markets are in particular priced for tax reform," Crescenzi added. "But households have to feel confident about tax cuts staying permanent. This means then in a sense that the Republicans will stay in power for at least four years, and the tax cuts won't sunset too quickly."
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