The stock market continues to rally, with the Dow Jones Industrial Average marching toward the 14,000 level, but strategist Douglas Kass said Tuesday that the highs for the year may be in.
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"Fiscal and monetary policy is not only unsustainable, but these policy initiatives are diminishing in strength," Kass said on CNBC's "Futures Now." "Basically, our country is running trillions of dollars in deficits while maintaining zero interest rates and these are unsustainable policy strategies."
Unless the economy makes a quick turnaround, Kass said it's "inevitable" these policies will be reversed, resulting in slower economic growth, rising interest rates and less attractive valuations.
Kass said the "most vulnerable part of our economy," though, is the fragility of the consumer. The troubles are myriad, he said – the worst economic downturn since the Great Depression, continued job insecurity, incomes have not kept pace with the cost of living and home prices have lost considerable value. Meanwhile, retail investors faced two stock market downturns in the past decade, as well as the 'flash crash,' when the Dow Jones Industrial Average dropped nearly 1,000 points in a matter of minutes on May 6, 2010.
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"I think consumer behavior is going to be markedly different. You add back the fiscal drag of a rise in the payroll taxes and higher income tax rates and you start [to] manifest today in a conspicuous drop in consumer confidence," Kass said, adding "we are in the process of making the yearly high for the year."
In turn, Kass thinks the S&P 500 could soon drop by as much as 7 percent from current levels. He added it could end the year at the 1,425 level.
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Kass has called a couple of bottoms in the past few years: Less than a week before the S&P 500 hit a generational low of 676 on March 9, 2009, Kass went on CNBC and predicted the bottom. On July 6, 2010, he said the market had made its lows for the year and that also proved true.