There comes a time in every presidential administration in which politics and economics become intertwined to the point which the combination of the two creates an inflection point. The action last week in both stocks and bonds suggest that we have arrived at that crucial juncture. The volatility of the last few weeks is directly related to turbulence in DC. Markets don’t like the unknown and the dysfunction in Washington has only made the forecast more difficult for corporate America.

Tune in to Closing Bell at 3 pm on Tuesday. Jack Bouroudjian will be a guest.

Upon hearing the news of Steve Bannon’s departure, a huge roar could be heard on every trading floor. Why? Because capital markets are still looking for legislative print and economic certainty. That has been lacking in the first few months of the Trump presidency, and Bannon was seen as an obstacle to getting the job done. Aside from presidential orders that reduce the stranglehold of regulations on various industries, needed tax reform and health care fixes seem to be drifting further and further away.

We have heard time and again that the market is one of the best barometers for reading the health of the presidency. President Trump himself keeps referring to the new all-time highs which are being set on, what seems, a daily basis as an endorsement of his policies.

But before we start to pat ourselves on the back for the earnings growth and the strength of the market, let’s keep in mind most of the gains have been dollar related. It’s simple; the S&P 500 has been up roughly 9 percent year to date and the dollar has been down about the same. Just think, if you were an investor coming out of the Euro zone, chances are you are breaking even or even losing money for the year being invested in U.S. stocks. For this rally to be one which is built on strong fundamentals, we need King Dollar plain and simple.

The struggling greenback is a symptom of a problem. It is the first line of attack when the rest of the global economy senses dysfunction. Even the recent runs to new all-time highs in the Dow and S&P were done with little depth and without wide participation. Most of the run was attributed to a couple of stocks. Case in point: The run from Dow 21K to 22K had Boeing responsible for roughly 400 points of that move. That is narrow leadership. The Nasdaq market, with the high-flying FANG stocks, seems even worse with those few stocks running the index up 20 percent in a few months of this year.

Make no mistake, stocks are heading for a pullback. The real question is will this how deep will it be. That will depend on the headlines coming out of DC. The linking of politics and the markets has left capital vulnerable to headlines which can cause a move of one or two standard deviations. In other words, we are one headline or tweet away from a 500 to 1000-point move either way in the Dow.

The deception in the markets is in the fact that corporate profits look as if they are getting better and the market is pricing in another bump in revenues. But that same profitability is only possible if the dollar were to move down another 9 or 10 percent. Is that something we really want?

Without a stronger dollar, these moves in the stock market don’t mean as much. It’s a slippery slope. We want multi-national corporations to show strong numbers but we need a strong dollar for longer term strength and international trade. Weak currencies weaken nations; that is a fact. A falling dollar might look good for an earnings period but is fatal in the long run for corporations and the nation. Worse yet, a deteriorating currency is indicative of global players losing confidence in DC.

As I wrote earlier, the market has hit an inflection point. With the first few months behind him President Trump must get to the point of leading towards legislative print to enact his pro-growth policies. If he is distracted from that mission, the dollar and the markets will suffer. We can’t depend on a falling dollar for further gains in stocks. There are only a hand full of days which congress will meet after returning from the August vacation (Not a recess!) and they must get to work.

Unless the markets see action out of our legislators and executive quickly, look for the road to be a difficult one for stocks for the rest of the year. Right now, the market is lacking real leadership. Bull moves in stocks are great but it’s always nice to leave a party a little early. Time for protection into the tough months ahead. Is it a three to five percent pullback or a 10 percent correction…Stay tuned.

Commentary by Jack Bouroudjian, CEO of Index Futures Group LLC, a registered independent broker, and CIO of Index Capital Partners, a registered commodity-pool operator. He was also a three-term director of the Chicago Mercantile Exchange and founder and advisor of UCX (Universal Compute Exchange). Follow him on Twitter @JackBouroudjian.

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