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Trump’s ‘big fat bubble’ trouble in the stock market

NEW YORK — Seen from Wall Street, the Trump presidency is going perfectly.

Travel ban troubles? Whatever. Russian revelations? Meh. Staffing woes? Who cares. Stocks continue to shrug it all off and rocket to new highs on the promise of big tax cuts, infrastructure spending and mass deregulation.

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But analysts now caution that Trumphoria in the stock market could soon crash into a harsh Washington reality.

Before even getting to tax reform — where there is little agreement on the way forward — Republicans have to figure out how to repeal and replace Obamacare, win confirmation for a Supreme Court justice and deal with Democrats eager to slam the brakes on anything and everything President Donald Trump tries to do.

The result could be that a frothy stock market Trump derided as a “big fat bubble” before the election — but now takes credit for — suddenly plummets back to Earth.

“The stock market is completely wrong,” said Douglas Kass of hedge fund Seabreeze Partners. “My view is that the fiscal path and regulatory reforms coming out of Washington and the new administration are likely to provide a lesser and later contribution to economic and profit growth than the consensus expects. I don’t think it should be friendly to the markets.”

So far that view is losing — big league — on Wall Street.

Major market indicators continue to hit new highs. The Dow and Nasdaq are up 13 percent since Trump’s win. The SP is up 10 percent. But markets are also flashing warnings that investors may have raced ahead too fast.

The SP now trades at about 27 times earnings, above its long-term average of about 16. It trades at 17.6 times expected earnings, the highest level since June 2004. The SP is now 9 percent higher than its 200-day average, often a signal that a correction is ahead.

Traders and market analysts say investors are now treating stock prices like a cut in the corporate tax rate to 20 percent or lower within the year is basically guaranteed along with a pop in growth to 3 percent or better by next year.

So stocks appear ripe for a Washington-based reality check should it become clear that a quick strike on slashing the top corporate tax rate is not going to happen. And that could come soon with top House Republicans including Speaker Paul Ryan pushing a border-adjustable tax that many Senate Republicans hate.

Trump on Wednesday said his version of tax reform is “nearly done” but it would wait until after the health care fight. Wall Street took a pause in its relentless march higher following the remarks.

“Those comments were frustrating to people in the market because Republicans in Congress have been complaining about Obamacare for seven years. Now, all of a sudden, they are in control and don’t have a plan,” said Art Cashin, the veteran director of floor services for UBS at the New York Stock Exchange. “For all the people saying this rally isn’t about Trump, it really is very much about him and hope for what he can deliver. And if over the next several weeks we don’t get details or there is a backlash against the tax plan, then the market will show significant disappointment.”

The administration seems aware that market patience for a big tax cut plan is not unlimited. Treasury Secretary Steven Mnuchin in two interviews this week pledged to get a plan through Congress by August, something that could get done through a budget reconciliation process that would not require Democratic votes.

And Mnuchin, like Trump, took credit for the stock market rally.

“You can see the stock market’s up, you can see the dollar’s up. There’s a lot of confidence in the Trump administration,” he said Thursday on CNBC.

That’s clearly true, despite all the daily drama that engulfs the Washington conversation from judges blocking the travel ban, to questions about the Trump campaign’s dealings with Russia to the president’s own rollicking Twitter account and constant attacks on the media.

Traders mostly dismiss this as media noise that won’t get in the way of the broader growth agenda. “I really think outside of the Beltway, a lot of people are giggling at the way he does things — they’re kind of happy with this sort of unusual presidency,” said Steve Massocca of Wedbush Equity Management. “People think that the policies he brings to bear are going to be very, very good for the economy and all the other silliness that goes on, the tweeting, it doesn’t matter. It’s a non-issue.”

This view could be tested in the coming months if the White House’s rollout of an updated tax plan leads to a split with House Republicans pushing the border tax or if fiscal hawks decide the plan would add too much to the deficit. Markets could also prove sensitive to immigration moves that reduce the size of the U.S. workforce or more talk of trade confrontations with Mexico or China.

And Republicans are getting hammered at town halls back home over their plans to roll back Obamacare, signaling a fight that could drag on for weeks and slow the timing of a tax plan.

“The market is looking for reasons to go higher, and the administration has provided it,” said Scott Clemons of Brown Brothers Harriman. “Right now, a lot of that is projection, hopes and intentions, which — when it collides with the reality of having to deal with Congress, even held by the president’s own party — that leads to disappointment down the road.”

Even the investment banking firm that has arguably benefited most from Trump’s election, Goldman Sachs, is beginning to sour on hopes for a quick economic boom. Goldman has sent several former executives to the White House, including Mnuchin and National Economic Council chief Gary Cohn, who are leading the tax reform efforts. The bank’s stock price is up about 40 percent since Trump was eleceted, part of big rally in financial stocks on the assumption that Trump will be able to quickly roll back the Dodd-Frank financial reform act, something that Washington analysts also think will be much harder than the market seems to believe.

“The difficulty the Republican majority is having addressing [Obamacare] suggests that lawmakers might ultimately need to scale back their ambitions in other areas as well, such as tax reform,” Goldman analyst Alec Phillips wrote in a note to clients this week.

But for now, the unshakable view around Wall Street trading floors is that Trump will deliver tax cuts and unshackle corporate America from regulation. Nothing else really matters.

“Next year, there are 13 Democratic senators up for reelection in reddish states,” said Massocca. “If you get eight wins by the Republicans, and now we have a filibuster proof majority in the Senate, then the market could double.”

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