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3 threats from Washington that mean trouble for stocks

A man in a suit stands outside of the New York Stock Exchange.
A man in a suit stands outside of the New York Stock Exchange.

Eight years ago today, the S&P 500 (^GSPC) touched an intraday low of 666.79. All of everyone’s worst fears about the financial crisis was priced into the market and then some. That day was the start of the epic ongoing run in stock prices, which has the S&P 500 about 20 points away from its all-time high.

The most recent leg of this bull market has been attributed to President Donald Trump’s business-friendly policy promises, led by big corporate tax cuts. Indeed, Treasury Secretary Steven Mnuchin recently said that he expects a tax reform plan to be passed through the Senate and House by July before the autumn recess.

Unfortunately, Trump’s administration may be creating its own hurdles to accomplish its goal of “making America great again.”

Greg Valliere, Chief Global Strategist at Horizon Investments, summed up Trump’s recent messy weekend: “1. Unsubstantiated allegations that Barack Obama ordered wiretaps of Donald Trump’s residence (Obama is a “sick guy,” Trump tweeted). 2. The intelligence community, which loathes Trump, continuing its drumbeat against him. 3. Rumors swirling about who will leave the White House first – Reince Priebus or Sean Spicer?”

Valliere isn’t yet convinced that this “astonishing intrigue and chaos” in Washington will kill the market’s spirits. But he does identify three threats (verbatim):

“1. The Trump agenda stalls. Exhibit A is the Obamacare replacement bill, now in serious trouble in the House. Paul Ryan has a bill ready for committee markup, but conservatives are balking over refundable tax credits, which they view as a new entitlement program. Lawmakers are looking for leadership from Trump, who is distracted. Maybe a replacement bill can pass in the House later in the spring – but until it does, tax reform will stay on the back burner.

“2. Republicans begin to defect. This is the political issue to watch; the Democrats, still divided and relentlessly negative, aren’t much of an opposition. But there’s a GOP insurrection brewing in the Senate; nearly a dozen Republicans are essentially anti-Trump and virtually no one supports his allegation that Obama wiretapped him.

“3. The U.S. loses international prestige. An image of Washington in disarray sends a signal to U.S. allies and adversaries, and a geopolitical crisis is inevitable; one is brewing with North Korea. Our take is that many countries – led by Germany – will go their own way on trade and defense rather than deal with Trump.”

When Trump was elected, he inherited a robust world-leading economy and his party had control of the House and the Senate. He has all the tailwinds a leader could ask for. But is there nowhere left to go but down?

With markets at record highs, earnings growth sputtering, valuation stretched, and sentiment at very bullish levels, there seems to be no shortage of warning signs in the market these days.

While it’s usually a mistake to predict doom for bull markets, it’s nevertheless prudent to be prepared for volatility.

Sam Ro is managing editor at Yahoo Finance.
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