Trump is about to face his biggest test yet - and investors should be nervous

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President-elect Donald Trump

President Donald Trump has a huge week ahead of him, and how it plays out will have a huge impact on the market.

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Trump has indicated that he wants to tackle the repeal and replacement of Obamacare and introduce his "massive" tax plan in the next week, all while a shutdown of parts of federal government looms Friday.

By attempting three massive political undertakings in one week, investors will have a sense of whether or not Trump will be able to deliver on pro-growth policies that would be beneficial for markets.

If Trump can pull off the trifecta, it could restore faith that policy proposals like tax cuts and infrastructure spending are on the way. If not, look out.

Healthcare, tax cuts, and a shutdown. Oh my.

Trump has laid out an ambitious schedule of events for Congress in the next week.

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After an initial defeat in March, the White House has indicated that it wants to bring a new version of the American Health Care Act to the floor of the House, possibly by Wednesday.

Even with a new amendment proposed by the leaders of two caucuses on either side of the Republican party - the conservative House Freedom Caucus and moderate Tuesday Group - it is unclear whether the bill will have enough support to make out out of the House.

Also, Trump told the Associated Press in an interview on Friday that he is targeting a Wednesday release date for his "massive" tax cut plan. Trump has said that he wants to bring the corporate tax rate down to 15%.

The move has long been the most anticipated by investors because slashing the corporate tax rate would likely lead to a major increase in corporate profit margins and justify the post-election rally in stocks.

Finally, there remains the huge risk of a possible government shutdown. If a continuing resolution or spending bill is not passed by the end of Friday, sections of the federal government could be without funding and shut down.

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Conservatives, the White House, and Democrats all have demands for additions to the bill, according to reports. Office of Management and Budget Director Mick Mulvaney even said the White House would trade $1 of funding for Obamacare to Democrats for $1 in funding for Trump's promised border wall.

These horse trading issues could throw a wrench in the negotiations, according to political research firm Compass Point's Issac Boltanksy and Lukas Davas.

"The border wall funding issue is just one of many policy potholes that could disrupt the funding negotiations including ACA cost-sharing subsidies, coal miner benefits, and sanctuary cities," Boltanksy and Davaz wrote in a note to clients on Friday.

Trump has laid out a huge undertaking that he plans to handle in one week, and any missteps could make investors very worried.

Trump trade already fading

Immediately following the election, the possibility of fiscal stimulus and tax cuts caused a massive jump in stock prices, particularly in those sectors like financials and industrials that would benefit the most from Trump's plans.

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As we've reported, the so-called "Trump trade" has hit a wall recently and appears to be in danger of sputtering out.

Failure to deliver on next week's promises, especially avoiding a government shutdown, could be the straw that breaks the rally's back.

Republicans control both chambers of Congress and the White House, and so a shutdown would put into doubt the party's ability to pass any pro-growth reforms that investors want to see.

"Shutdowns can have a significant impact on the political standing of lawmakers involved," Ward McCarthy, chief financial economist at Jefferies wrote in a note on Tuesday.

"Considering that no full government shutdown has ever occurred while the same party controlled the White House, Senate, and House of Representatives, it would seem that Republicans would have some additional motivation to avoid the dubious distinction of having the government shut down on their watch."

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The Washington Post reported that most experts peg the possibility of a shutdown at roughly 50/50 as it stands now, but investors disdain any amount of uncertainty.

The failure of the American Health Care Act and the pushback of tax reform already dented investor confidence, but a shutdown - something that has a hard deadline and immediate implications - would be even worse for Trump.

In a report following the failure of the AHCA, Compas Point's Issac Boltansky and Lukas Davaz said that the failure to pass a deal would throw the tax reform question further in doubt.

"In order to avoid a government shutdown, Speaker Ryan will have to cobble together a coalition, which will likely require assistance from Leader Pelosi given the Freedom Caucus' expected demands," Boltansky and Davas wrote. "Furthermore, an inability to successfully navigate the April 28 federal funding deadline would be a staggering failure in basic governing and would therefore diminish our optimism regarding tax reform."

On the other hand, if Trump is able to deliver, the Trump rally could be back on.

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"Congress still seems far apart on the spending plans they need to agree on in order to avoid a government shutdown on April 28th, but talk of a new healthcare bill suggests that maybe more progress is being made behind the scenes than we realized," McCarthy, chief financial economist at Jefferies, wrote in a note on Friday.

"Progress there could push the markets to higher rates as some optimism regarding Trump's economic policies starts to filter back in to the consensus."

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