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A storm is brewing in U.S. markets, and one Wall Street expert says the safest umbrella is made of green.
Bulltick Capital Markets' Kathryn Rooney Vera warned CNBC this week that a showdown is looming between President Donald Trump and House Speaker Paul Ryan over budget cuts, and the fallout could shake markets.
According to the analyst, part of the problem is that investors appear to be operating as if corporate tax cuts are a done deal. This misconception, along with emerging divisions in reforming Obamacare and pulling off a border adjustment tax, could negatively impact U.S. markets.
That could also boost the U.S. dollar, she added.
"The dollar goes up 20 percent if we have a border adjustment tax," Vera told CNBC "Futures Now" this week, when asked if investors should seek safety. For several reasons, she argued a tax on imports—an idea that's polarized Democrats and Republicans alike—could be beneficial for the greenback.
"Economic principle says that a value added tax accompanied by, perhaps, a wage deduction is positive for the dollar," Vera said. "The fact is, we're the only country in the developed world that doesn't have a value added tax that's border-adjusted and that also has a corporate income tax structure."
Value added taxes (VAT) function as a levy on consumption rather than on savings and investment, and are widely used in Europe and other parts of the world. However, some economists argue the VAT disproportionately hits lower income consumers, and as a result the U.S. should be wary of implementing one of its own.
Vera contended that a border adjustment tax would be a major revenue generator for the U.S. economy as it turns, "a vice into a virtue. We have huge trade deficit. A border adjustment tax would allow us to tax that. Imports get taxed while exports get subsidized."
While Vera warned that a Trump administration policy logjam would be negative for markets and the dollar, she was relatively confident the GOP majority could achieve results.
"My contention is that tax reform is going to come alongside a debt ceiling increase," said Vera, speaking about the March 15 deadline for Washington to set a new statutory borrowing limit.
"A Republican-controlled Congress is going to require it," Vera said. "Increasing the debt ceiling without some off-setting measures would be politically complicated."
The next threat to the so-called Trump rally is brewing across the pond, said Samantha Azzarello, global market strategist at JPMorgan Asset Management.
While Azzarello believes that U.S. markets are already looking a bit too optimistic, she sees the upcoming French election as the next "meteorite" that could hit equities.
"European political risk is headline, and it might not hurt European equity markets because the fundamentals are looking good there," Azzarello said Tuesday on CNBC's "Futures Now.""No doubt it has the ability to cast volatility or to influence markets in the short term."
The first round of the French presidential elections is scheduled to take place April 23, and eyes are on the right-wing National Front and euroskeptic Marine Le Pen, who has been gaining in the polls. Azzarello believes that the results of the election, which will end in May after pitting the top two candidates against each other, could have implications for the Federal Reserve as well.
Analysts have predicted that the Fed could hike rates anywhere between two to four times this year, and Azzarello suggests that anything that would cause a stock market "tantrum," like the French election, could motivate the U.S. central bank to raise rates only twice.
"The Fed is cautious, they have a bias to being on hold versus moving too fast, so I think that's important to keep in mind," she said.
This, along with political uncertainty from Washington, could mean that U.S. equities are overshooting.
"The market in some sense has had tunnel vision," said Azzarello. "While a lot of the gains we've seen might have had to do with reflation and the idea that global growth is picking up, when the market moves as fast and ferocious as it really did, it's hard not to say that we're all looking to Washington for positives."
"While we may get some of [the positives] they may come with a lag and we might not get tax reform until 2018," she added. "Yet the market in 2017 has already priced that in."
Former top federal budget official David Stockman has a stark warning for investors: There's going to be a disaster in Washington and you're not going to see it coming.
Stockman, an ardent critic of President Donald Trump, has strong doubts that the rosy view investors are taking on the economy can hold water in the near-term. As usual, he didn't mince words when explaining his perspective to CNBC.
Last week, the Dow Jones Industrial Average and S&P 500 Index jumped following Trump's speech to Congress, with markets growing more bullish about the Trump policy agenda. Yet since Wednesday, both indexes have failed to continue the trend of new highs.
The stall in the rally has Stockman, former OMB director under the Reagan administration, labeling Trump's address as "irrelevant" to what will happen to the market and the economy.
"Wall Street is totally misreading Washington," Stockman told CNBC's "Futures Now"in a recent interview. "It's pricing in a fantasy about a Trump stimulus that simply isn't going to happen. There will be no tax cut, there will be no 15 or 20 dollar a share reduction in the corporate rate."
According to Stockman, the main catalyst for his pessimism about Trump's policies is the "debt ceiling trap" that he contended will prevent tax reform, infrastructure and defense spending that have excited so many investors.
Given the "factions" among the Republican Party today, the former Reagan aide also believed that the political turmoil could result in a gridlock the markets don't see coming.
"We will have a government shutdown," said Stockman. "It is totally unexpected, unpriced in by Wall Street, [and] it will spook everybody."
At least for now, the Federal Reserve believes current economic conditions — bolstered in part by Trump's policy agenda—justify tighter monetary policy as a preemptive strike on price pressures. On Friday, Fed chair Janet Yellen strongly hinted that a rate hike was on the table when the Fed meets this month.
Yellen told an audience that "gradual increases in the federal funds rate will likely be appropriate in the months and years ahead: Those increases would keep the economy from significantly overheating, thereby sustaining the expansion and maintaining price stability."
Stockman, however, remained unimpressed.
"I see nothing to re-accelerate the economy or profits, and I see a huge mess, bloodbath, fiscal stalemate in Washington that will remove any of the stimulus that any of the traders are expecting from infrastructure and big tax cuts and all the rest," he added.
The stock market is getting closer to a critical juncture — one that could significantly derail the so-called 'Trump rally.'
"You could enter into a really interesting period where the Fed is raising rates and some of the promises don't get delivered in a market that's arguably at least fairly valued, but we would say 'overvalued,'" Eibel said recently on "Futures Now."
He added: "That's the moment that maybe you start seeing this market move down."
Eibel acknowledged that just when you think stocks won't break any more records, they do. However, he believed the odds of repeat performances are dwindling.
"Could the U.S. market continue to go up higher? Sure. But we seem to be priced for perfection," he said — citing valuations, a strong dollar, corporate earnings and the President's business friendly address to a joint session of Congress last Tuesday.
Eibel's latest forecast comes less than two weeks before this month's Fed meeting. It will deliver its decision on interest rates and issue a statement on March 15th, and many analysts expect a rate hike.
"We thought two rate hikes starting in May or June. We think that March is definitely on the table now," said Eibel.
The Wall Street consensus has also been pointing towards a March hike. On Friday, Fed Chair Janet Yellen dropped a strong hint that an interest rate hike is on the way.
'No wiggle room'
The chances have been climbing as the markets make fresh highs. The Dow hitting another milestone this week, closing over 21,000 on Wednesday for the first time ever. The S&P 500 has also been on fire, soaring more than 11 percent since President Trump's election win last November.
Yet Eibel is keeping his excitement at bay over the S&P's historical bull run. He saw the S&P falling ten percent from current levels to 2150 by this time next year.
"You have no wiggle room on perfection," he said. "Buy low, sell high. That's what we're trying to do."
He suggested looking thousands of miles away to weather the potential storm.
"Why not move some of that money offshore within a multi-asset framework? Look what emerging markets are doing this year. And, even with five elections around the table, look what Europe is doing right now, holding up quite nicely," said Eibel.
"We just think there are better places to put your equity money right now."
The "very complacent" market is discounting three critical trends that could ultimately lead to a correction, Marc Faber, editor of The Gloom, Boom & Doom Report, told CNBC on Thursday.
The man also known as "Dr. Doom" said on "Fast Money Halftime Report" that foreign currencies, the U.S. economy and the Trump administration could all contribute to a significant dip.
Faber said the stability of the U.S. economy relative to foreign nations' economies has attracted capital to the United States, boosting the dollar and stock prices. But the trend could reverse, he said.
"I believe the time will come when the weakness of the euro becomes uncomfortable for the Europeans, specifically the Germans, and then there will be a reverse," Faber said. "And the dollar will go down, and the money that flowed into U.S. assets will flow out of U.S. assets, and so the market is more likely to go down."
And, while the U.S. economy looks strong relative to other countries', Faber contended that it is still quite weak based on indicators like tax receipts, car sales and personal consumption levels.
Stocks could see a further 6 percent rise this year, according to market strategist Ed Yardeni.
Yardeni, president of Yardeni Research, has a year-end price target on the S&P 500 ranging from 2,400 up to 2,500. He fixed the target despite the uncertainty about whether President Donald Trump's pro-growth promises will be fulfilled.
"The stock market seems to be tuning out all the noise and [is] kind of focusing on what investors think is the underlying signal coming out of Washington," Yardeni said Thursday on CNBC's "Futures Now." "That is with a Republican president and a Republican Congress, it's very likely that of all the things that the administration has proposed, tax reform, including tax cuts and repatriated earnings, are the most likely programs to get through."
In the "bullish scenario" that sees the president "fast-track tax cuts, tax reform, repatriated earnings and deregulation," "stocks would certainly move to new record highs for a while simply because earnings would rise sharply," Yardeni wrote in a Thursday note.
At the same time, Yardeni acknowledged that Trump's "protectionist language has been of concern," and could ultimately lead to big trouble for stocks.
Still, the good news for the market is that the economy overall has strengthened, meaning that equities are on somewhat firmer ground — particularly given the recent recovery in the oil patch.
"Energy is no longer weighing down on overall corporate earnings, and corporate earnings are doing remarkably well especially in the face of a strong dollar," he said.
U.S. stock futures were lower Friday morning after a five-session run of record closes ended for the S&P 500 and Nasdaq on Thursday. The Dow, however, extended its streak of new highs to six in a row.
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