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A ‘day of reckoning’ is coming for stocks. Here’s what could spark it, says market watcher

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Fed complacency could be the next risk that rocks markets, strategist says

The Dow is on its longest losing streak in more than a year as the U.S. and China try to top each other's tariff threats in an escalating trade conflict.

But David Spika, president of GuideStone Capital Management, says a far larger risk looming over markets could trigger a "day of reckoning."

"Fears of a trade war, which could clearly drive up inflation, impact economic growth negatively, are causing investors to sell," Spika told CNBC's "Trading Nation " on Tuesday. "The bigger concern should be the impact of central bank tightening."

The Federal Reserve took its latest step in normalizing monetary policy last week when it raised interest rates for the second time this year and seventh time of this rate-hiking cycle. Also last week, the European Central Bank said it would wind down its bond-buying program by year-end.

"We've gone through a nine-year period where gains were largely predicated on liquidity produced by the central bank, both here in the U.S. and central banks overseas," said Spika. "We've never seen this before. We've never seen this long a period of central bank stimulus."

The Fed's slow-and-steady approach to quantitative tightening since 2015 has lulled markets into a sense of security that could quickly vanish, says Spika.

"There's just this complacency about their ability to thread the needle — that, 'you know what, they'll get it right? They've gotten it right for nine years, they're going to continue to get it right.' But we've never seen this before," he said. "Just as central bank stimulus was positive on stocks on the way up, we think central bank tightening will have a negative impact as we go over the top there."

The Fed announced its first round of quantitative easing in late 2008 in response to crashing financial systems and a stock market in crisis. Around four months later, the S&P 500 hit its bottom. Since then, the benchmark index has rallied 310 percent in the second-longest bull market in history.

Those good times could be coming to an end, Spika says.

"Eventually there will be a recession and the market will start pricing that in. That's not likely to happen this year. Next year is a real possibility given that a lot of the stimulus that's in the system won't have as big an impact next year and the Fed will continue to tighten," warned Spika.

The Fed is expected to hike interest rates at least two more times this year, the next likely to come as soon as September, according to CME Group fed funds futures. At the same time, the central bank is shrinking its balance sheet loaded with more than $4 trillion in assets.

The Dow ended Tuesday's session nearly 300 points lower in its sixth straight session in the red. The blue-chip index has not seen a losing streak this long since March 2017.

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A ‘day of reckoning’ lies ahead for stocks. The culprit may not be a trade war